The US labor market is becoming the main headache for the dollar. On Thursday, it weakened strongly across the board, not only due to renewed risk appetite. Investor sentiment, by the way, improved amid news that Saudi Arabia could pump more oil, as well as reports of the easing of some Covid restrictions in China. Shanghai is coming back to life after two months of lockdown, shops are reopening, people are returning to their normal way of life.
The US currency index intensified its decline after the release of labor statistics, which became a reminder of the bitter truth.
The number of employed in the US private sector grew much less than expected. The figure was 128,000 versus an expected 300,000 and an increase of 247,000 in April. Looking at the downbeat ADP, demand for labor is starting to slow amid higher interest rates and tightening financial conditions, although the number of vacancies remains extremely high.
Weekly statistics are also not impressive. Initial jobless claims fell to 200,000 instead of an expected drop to 210,000 and up from 211,000 a week earlier.
US jobs data no longer matters. The state of the labor market is one of the main indicators of the state of the economy for the Federal Reserve when adjusting policy. In this regard, on Friday, much attention should be paid to the release of the unemployment rate. It is assumed that the indicator fell to 3.5% in May from 3.6% in April, and the number of people employed in non-agricultural sectors of the economy increased by 325,000 people.
The reaction to the ADP in terms of employment is usually not so strong and is often ignored by the market, but not this time. Meanwhile, Commerzbank believes that labor statistics, like Friday's payrolls, will not receive a proper response from market players. There can only be short-term emotions.
"The data on the labor market will not be decisive for the dollar at this time," economists write.
"It all depends on the person whether he wants to buy or sell the dollar as a result of labor market data. However, the data doesn't really provide a particularly good reason right now," the post reads.
The dollar also began to react again to signs of an impending recession in the US. Growth in the US economy has slowed in recent weeks due to high inflation and rising interest rates.
The dollar index is under pressure, as a result, the two-day growth can be completely offset. The indicator lost almost half of its profit on Thursday and risks retesting the 101.30 mark in the near future.
The failure of the US dollar to trigger a bigger bounce could encourage bears to re-enter the market and shift focus first to a potential test of the March low, followed by weaker readings.
The 100.90 mark is still an important reference point. As long as the dollar maintains a stable upward dynamics, nothing threatens it.
Is it worth buying the loonie?
The USD/CAD pair looks promising for trading. Bank of Canada Deputy Governor Paul Beaudry said on Thursday that the central bank sees a growing likelihood of a rate hike to 3%. Traders took this as a call to action.
The loonie recovers from falling to 1.2700 against the US dollar. USD/CAD fell to its lowest level in six weeks, testing 1.2500.
As economists note, the bounce of the US dollar from yesterday's low just before 1.26 formed a bullish signal on the short-term chart. The broader bearish trend in USD/CAD remains unchanged.
Although the USD/CAD pair looks oversold at the moment, there are no signs of correction or consolidation yet. The next support level could be at 1.2570 followed by the 1.2535 area. Resistance levels are found at 1.2630 and 1.2670.
To reverse the loonie's upward trend, the US dollar must rise above 1.2685, only then the pressure on it will soften.
