Yesterday, the EUR/USD pair showed an upward trend, which was not only caused by the general weakness of the US currency, but also by the strengthening of the Euro. But despite the impulsive dynamics of growth, buyers of EUR/USD failed to break through the resistance level of 1.1850 (the upper line of the Bollinger Bands indicator on the D1 time frame).
In general, the main currency pair has been gradually but consistently rising since August 20, when Jerome Powell made a speech at the Jackson Hole symposium. After rebounding from a multi-month low of 1.1664, buyers won back almost 200 points, slowing down only in the area of the 18th figure. However, the upward pullback may continue today. The US dollar will be under the background pressure of the Fed's head's indecisive position until tomorrow's Nonfarm data are released. The key data on the US labor market will either strengthen this pressure or return interest to the US currency. In the meantime, EUR/USD traders are forced to follow the trading principle "buy on rumors, sell on facts". It can be assumed that this trading principle can prank the participants, luring them into the traps of false expectations.
The immediate reason for the next cycle of the US dollar's weakening was the ADP report. Yesterday, there was a very alarming signal in the form of a weak report from this agency, which is considered to be a problem before the release of Nonfarm. The US currency reflexively weakened all over the market including in a pair with the euro. However, there is one "but" here. There has been recently a low correlation between ADP and official figures. The latest reports did not coincide with Nonfarm data, so one should not blindly focus on them.
Let's recall the August releases. Despite the similarly weak ADP report, which preceded the official figures, the number of people employed in the private sector rose by 700 thousand (although the increase in the number of people employed in this sector amounted to just over 300 thousand based on the agency's data). This fact confirmed again the weak correlation of these reports, although the ADP sets the tone during the pre-crisis before the release of official data. It is noteworthy that the weak ADP report in August reinforced the positive effect of strong Nonfarm. The same thing may happen this month, given the previous forecasts regarding official data. America's unemployment rate should decline to 5.2%, and the number of people employed in the non-agricultural sector should rise by 750 thousand, and 610 thousand in the private sector, respectively.
In turn, the euro can also fall into a trap, reacting to the "pseudo-hawkish" intentions of the ECB. After the release of strong data on the European inflation growth, some ECB representatives tightened their rhetoric, calling for reducing emergency bond purchases in the next quarter. The corresponding statements were made by the head of the Bank of France Francois Villeroy de Galhau, the head of the Central Bank of the Netherlands Klaas Knot, and the head of the Central Bank of Austria Robert Holzmann. In their opinion, this issue should be discussed already at the September meeting, which will be held next week.
On the one hand, this is clearly a "hawkish" signal, which quite justifiably supported the European currency. However, even in this situation, there are "buts". First, not all ECB representatives share the "hawkish" intentions of their colleagues. In fact, the eurozone is divided into two parts: this is the northern part, consisting mainly of creditor countries with surplus economies, and the southern part, which includes deficit debtor economies. The European Central Bank actually reflects this division – the members of the regulator are representatives of the "hawkish" or "dovish" wing. In particular, the ECB's chief economist Philip Lane and the head of the Central Bank, Christine Lagarde, take a softer position: they have repeatedly urged their colleagues not to rush to revise the PEPP program.
As for the record growth of European inflation, it can be recalled that the ECB members approved a new strategy at the July meeting. According to it, inflation may temporarily exceed the target level of the Central Bank. Experts believe that the first increase in the ECB interest rate will take place no earlier than 2024. If we talk about the prospects of the incentive program, then it will be in effect until March 2022, and most likely, the strengthened APP program will replace the PEPP.
In other words, despite the fact that the Federal Reserve is now slowly and hesitantly moving towards reducing stimulus support, the US regulator is still several steps ahead of the European Central Bank (as well as other central banks of the leading countries of the world, with the exception of the RBNZ) in the context of normalizing monetary policy. This fundamental factor is the most significant trump card of the US currency. If tomorrow's Nonfarm data come out better than forecasts (or at least at the forecast level), the general interest in the US dollar will increase again, as traders will have special hopes for the Fed's September meeting.
Therefore, longs for the EUR/USD pair are quite risky. The US dollar can strengthen again despite the temporary weakness of dollar bulls, unlike the Euro currency, which is more vulnerable and does not have support from the ECB. Yesterday, we heard the opinions of representatives of the hawkish wing of the European Central Bank, and not the position of the regulator as a whole. In this case, we can assume that the optimism associated with the prospects of the euro is exaggerated.
At the moment, it is advisable to take a wait-and-see attitude for the EUR/USD pair until the release of Nonfarm this Friday.
