The report on the US labor market did not disappoint. In July, 943 thousand new jobs were created, and the data for the previous two months were significantly revised upwards. The unemployment rate declined from 5.9% to 5.4%. In addition, average wages are growing faster than forecast, which may also affect the growth of inflationary expectations. All these factors increase the chances of the Fed announcing the beginning of the curtailment of the QE program in September.
However, the Fed has no unity. Bullard believes that such an announcement should be made as soon as possible, Waller assumes the need to show 800+ job growth in July and August (the first condition has already been exceeded), but Brainard believes that it is necessary first to restore 2/3 of the 10 million failure in employment so that there are grounds for curtailing QE. This is about 6.5-7 million jobs, and considering the data for July, 4.3 million have been filled since December. According to Brainard, the condition is still far from being fulfilled and at least two more strong reports are needed.
In order to understand the real unemployment rate, it is necessary to compare the official data with the calculated data, which will represent the ratio of the amount of unemployed and those who drop out of the labor force to the potential labor force. It can be seen that these two indicators were very similar until about 2010, but a strong discrepancy began. This is due to a change in the calculation methodology, which now hides the real unemployment rate.
And if the Department of Labor reports that unemployment declined to 5.4% in July, then the Fed obviously knows the right numbers – as follows from the graph, the real unemployment rate is barely below 10%. The dynamics are not bad, and if we focus on the dynamics, the labor market is confidently recovering. But if we proceed from absolute figures, then the labor market is still very far from recovering.
The CFTC report is ambiguous. The growth in demand for the US dollar has stopped, which can simply be explained. This correction occurred taking into account the results of the FOMC meeting in July and is likely to be very short.
This is the first movement against the US dollar in 8 weeks, and there is no reason to expect a downward reversal yet. Given the strong employment report, it can be assumed that the US dollar will resume its offensive, especially if the general mood is supported by comments from FOMC members.
EUR/USD
The euro's net long position did not change over the reporting week. The target price got near the long-term average, which shows signs of a bullish reversal, but so far, they cannot be considered significant at least in any way.
The Sentix Confidence Index will be published today, followed by the ZEW Index on Tuesday. The forecasts are positive, but even good data will not be enough for the euro to reverse. It is necessary to see a change in the ECB's rhetoric, but this is exactly the problem – ECB members shy away from direct answers on the timing of the curtailment of QE, referring to the spread of the Delta strain of coronavirus.
Most likely, the ECB will take a break until the Fed announces its position, and according to the most optimistic scenario, this will happen not earlier than September. Accordingly, the appearance of a bullish driver for the euro until autumn is unlikely. The most likely scenario is a decline to the level of 1.17 and an attempt to update the low. The next resistances are located at 1.1605 and 1.1500.
GBP/USD
Taking into account the changes in the Bank of England's rhetoric, we can expect the QE to collapse by the end of the year. The pound was actively bought in the reporting week and its net short position fell by 486 million, namely to a symbolic -7 million. The estimated price is trying to rise above the long-term average.
As mentioned above, we can expect the beginning of the curtailment of QE by the end of the year, which, together with some other announced changes, can be regarded as a bullish factor for the pound sterling. After the BoE meeting, the pound could not go up, since the market focused on Nonfarm data. It simply did not consider all other drivers, but there may be a good opportunity for growth on Thursday. An extensive package of macroeconomic data will be published on the said date, including GDP, industrial production and trade. The forecasts are generally positive, especially for GDP. Once they are confirmed, the pound may try to update the high of 1.3981 again.
