The December Nonfarm data, which was published last Friday, exerted slight pressure on the US dollar. The controversial release helped the EUR/USD buyers to approach the upper border of the range 1.1260-1.1360. However, this is where the upward impulse faded: traders failed to consolidate above the level of 1.1360, and even more so could not test the resistance level of 1.1400 to indicate their ambitions. The price pushed off from the "ceiling" of the above range and started to gradually fall at the start of the new trading week. All this suggests that a more compelling fundamental reason is needed for an upward breakthrough, whereas the events of the current week may contribute to the strengthening of the US currency.
Today, the macroeconomic calendar for the pair is practically empty. The EU's labor market data will be published during the European session, but this release is belated. The November unemployment rate in the EU is expected to decline to 7.2%, but this fundamental factor is unlikely to provoke increased volatility. During the American session, the volume of stocks in wholesale warehouses in the US will be published. But here, we are talking about outdated (November) data.
A major volatility storm is expected on Tuesday and Wednesday. Tomorrow, Fed Chairman Jerome Powell will make a speech in the Senate. And figuratively speaking, he will present himself. The White House officially announced last week that it had sent nominations for Jerome Powell and Lael Brainard to the Senate for confirmation. If Powell is supported by senators (which is very likely), he will become the next chairman and vice chairman of the Federal Reserve, respectively. It can be recalled that last fall, he allowed terminating the stimulus program for the first time. This speech became the starting point for strengthening the positions of the USD bulls.
Today, the head of the Federal Reserve can also contribute to the strengthening of the US dollar if he allows a double or even triple rate hike within the current year. During his previous speeches, he has repeatedly focused his attention on the US labor market. Given the controversial nature of the latest Nonfarm, the situation can favor the US dollar or not, depending on how Powell sets the tone in the Senate. Last Friday, it became known that the US unemployment rate declined to 3.9% in December. This is the best result since March 2020. Traders were also pleased with the salaries. The average hourly wage rose to 4.7% (in annual terms) and to 0.6% (in monthly terms). Both components came out in the "green zone", exceeding the forecast values. On the other hand, the December Nonfarm reflected a weak increase in the number of people employed in the non-agricultural sector. This indicator increased by only 199 thousand against the forecasted growth of 410 thousand. Meanwhile, 211 thousand jobs were created in the private sector of the economy (forecast – 365 thousand), and 26 thousand (forecast - 35 thousand) in the manufacturing sector.
We believe that Powell's speech in the Senate will not dramatize the situation. He might focus on the actual decrease in the unemployment rate and the increase in the level of average wages. In this context, he may allow the first round of monetary policy tightening this spring (previously, such time benchmarks were voiced by Neel Kashkari). If so, the US dollar will receive significant support even if Powell does not directly mention the second increase this year in his speech.
On Wednesday, key data on the growth of US inflation will be published. It can be recalled that the November CPI accelerated to 6.8% y/y, which is the maximum value of the indicator over the past 39 years. The core CPI surged to 4.9% in annual terms. In this case, we are talking about a 30-year record. Inflationary pressure was widespread – prices were rising for food, energy, housing, cars (both new and used), medical care.
December inflation may surprise again with a spike in growth. According to preliminary forecasts, the general consumer price index in annual terms should grow to 7%. Core inflation, excluding volatile food and energy prices, may also rise to 5.4%. If this forecast comes true (not to mention the "green zone"), the Fed may take a more aggressive stance at the next meeting. Committee members can even interpret controversial Nonfarms in favor of tightening monetary policy.
Therefore, Jerome Powell's speech in the Senate and the release of inflation data in the US will set the tone for the EUR/USD pair. These are the main events of the week. Now, if the Fed chairman does not rule out the option of a double rate hike this year, and the CPI comes out at least at the forecast level, the US dollar will clearly receive support at least to test the lower limit of the range of 1.1260-1.1360. In my opinion, it is still advisable to use any upward bursts in prices as an excuse to open short positions with medium-term targets in the area of 1.1260-1.1240.
