For the most part of August, the greenback has been strengthening against its main competitors, including the euro, amid hopes of an early QE tapering.
However, some unexpected events interfered and caught bulls off guard. Thus, the EUR/USD pair managed to grow by more than 2% from the 9.5-month low logged on August 20.
Fed officials were worried that they had to delay the tightening of the monetary policy due to the rapid spread of the Delta variant in the United States.
The US dollar index was forced to retreat from the November 2020 high of 93.73 that was reached earlier.
The greenback continued to slide down after Fed Chairman Jerome Powell said at the annual Jackson Hole Symposium that a reduction in QE might occur this year. However, the regulator is unlikely to raise interest rates.
The Fed mentioned more than once that it would consider tapering of the bond-buying program if the labor market continued to recover steadily. For this reason, investors were waiting with bated breath for the Nonfarm Payrolls report.
Leading indicators pointed to a slowdown in the number of jobs the sector added. So, the fears of market participants for weak NFP data in August were partially justified.
The NFP report showed that last month the number of people employed in the non-agricultural sector of the United States expanded by only 235,000 against the projected increase of 750,000.
Disappointing NFP data called into question the timing of the tapering of asset purchases and caused a sell-off of the US currency.
As a result, the US dollar index fell to a one-month low of 91.94. The EUR/USD pair took advantage of the situation, soaring to 1.1908, the highest level since July 30.
Wells Fargo experts believe that the disappointing US employment figures for August make it extremely unlikely that the Federal Reserve will announce a reduction in asset purchases at the September meeting.
Bank of America expressed a similar opinion. "High-frequency labor market data are signaling a marked slowdown in employment activity in the August payroll survey week, suggesting downside risk to our forecast," Bank of America US economist Joseph Song said.
The bank also noted that such weak data lowered hopes about an early reduction of the bond-buying program.
At the same time, the main question is whether the slowdown in the expansion of the labor market is a temporary factor or it may continue in the long term.
According to experts, if the Nonfarm Payrolls report for November turns out to be better and inflation unexpectedly rises, then the likelihood of a reduction in asset purchases in November is quite high.
If the number of people employed in the US increases by only a few hundred thousand in September and inflation slows down, the Fed may wait until the new year to see more reports on the labor market between meetings in November and December.
Some economists believe that the weak NFP report in August is unlikely to force the Federal Reserve to taper QE this year.
Those Fed members who stick to a more hawkish approach may also support the dovish stance as one weak report is not the reason to wind down QE.
Given that the central bank is prone to reduce QE and talks about a possible increase in the key rate still circulate in the market, Rabobank analysts maintain their monthly forecast for the EUR/USD pair at 1.1800. They still believe that it may move to 1.1700 in the next three months.
After touching levels not seen since the end of July, the pair retreated to the level of 1.1880. Due to the lack of long positions, traders activated Take Profit orders ahead of the weekend.
At the same time, the bearish momentum for the US dollar faded quite quickly. The greenback was able to partially recoup its recent losses.
The disappointing NFP report for August was to some extent offset by an upward revision of the July indicator – to 1,053 from 943. In addition, the unemployment rate in the United States fell to 5.2% from 5.4%. The average hourly wage in the country increased by 0.6% on a monthly basis and by 4.3% on an annual basis.
The 10-year US Treasuries yield rose by more than 3%, helping the US dollar to move away from monthly lows.
On Monday, the US currency managed to recoup Friday's losses and jumped by more than 0.2% to 92.30.
Meanwhile, the EUR/USD pair started the new week in negative territory, retreating even further from recent highs.
Now, market participants will be waiting for any new clues about the reduction of the bond-buying program after the disappointing NFP report unveiled on Friday.
This week, some FOMC members will deliver a speech, namely John C. Williams, the president of the Federal Reserve Bank of New York, Robert Steven Kaplan, the president and CEO of the Federal Reserve Bank of Dallas, Charles Evans, the president of the Federal Reserve Bank of Chicago, Eric Rosengren, the president of the Federal Reserve of Boston, and Neil Kashkari, the president of the Federal Reserve of Minneapolis.
However, the main event of the week will be the ECB meeting scheduled for Thursday.
The recent rise of the EUR/USD pair to 1.1900 was not only thanks to the weakening of the US dollar. The growth was also stirred by expectations that the ECB may taper its emergency purchase program.
After some hawkish comments by individual ECB members, investors may be looking for signs that perhaps more ECB members may support a reduction in asset purchases, Commerzbank strategists think.
Yet, the hawks of the ECB Governing Council are worried about the recent increase in inflation in the eurozone. This is why the dovish stance looks more likely. Therefore, the monetary policy may remain dovish for the time being.
According to the consensus forecast of experts polled recently by Reuters, the ECB may announce a reduction in the pace of emergency bond purchases from the next quarter at a meeting this month. However, it will continue to buy assets until 2024, at least as part of its QE program, and possibly much longer.
In July, the head of the ECB, Christine Lagarde, noted that the regulator had learned lessons from past crises and would not jeopardize the recovery of the eurozone economy by withdrawing emergency support too early.
European Commissioner for Economics Paolo Gentiloni said on Monday that they were monitoring inflation in the eurozone. He also pointed out that it would be a mistake to tighten monetary policy now as many economists deeming the increase in inflation as temporary.
Market participants still seem to be waiting for the ECB to announce a reduction in the monthly volume of asset purchases this week.
However, a final decision on PEPP is unlikely to be made until December. ECB President Christine Lagarde may downplay the impact of a decrease in monthly asset purchases and will probably express a very dovish tone on monetary policy. Besides, the regulator is ready to adopt new stimulus measures, if necessary.
The euro is unlikely to assert strength against the US dollar even if the ECB reduces its Emergency Purchase Program.
Additionally, if the ECB decides to reduce its Pandemic Emergency Purchase Program, this may have little effect on the opinion that the ECB will lag behind in terms of monetary policy normalization among its G10 colleagues, analysts said.
On Monday, the EUR/USD pair extended Friday's pullback, heading to the 1.1850 mark.
If the pair breaks below 1.1835, it will indicate that the strong upward movement from 1.1665 started in early December has exhausted and bears may rake the upper hand. If so, the pair may decline to the 1.1800 level followed by the 1.1785 and 1.1700 levels.
Yet, bulls will probably prefer to wait for a strong breakout of the 1.1910 level before betting on further growth.
In case of strengthening of the bullish momentum, the pair may rise to 1.1940. It may well hit the level of 1.1975 and the psychological level of 1.2000.