The EUR/USD pair consolidated within the fifth figure, thanks to Jerome Powell, who voiced hawkish rhetoric in the walls of the U.S. Congress. But despite the strengthening bearish moods in the pair, the sellers could not overcome the 1.0520 support level, corresponding to the lower line of the Bollinger Bands indicator on the D1 timeframe. It is an important price barrier, overcoming which will open the way to the area of the 4th figure. Obviously, traders need additional information impulse for the next downward spurt. The February Nonfarm Payrolls report, which will be released tomorrow, March 10, could be such momentum.
Powell and Nonfarm
The U.S. Nonfarm Payrolls is important in its own right, but in light of recent events, the significance of this release has increased in many ways. Speaking to Congress, Fed Chairman Powell said that the labor market is "extremely tight" and contributes to inflation.
By and large, Fed officials have been saying the same thing for weeks, ever since the January Nonfarm Payrolls (which showed a half-million gain in employment) were released. The market, in particular, has started to talk about a possible "second order effect," whereby rising wages further unwinds inflation in a wage-price spiral.
Responding to questions from congressmen, Powell suggested that some easing in the labor market is needed to bring inflation under control. He said this is necessary so that "inflation will come down in the broad service sector, a labor-intensive part of the economy where prices continue to rise."
What the ADP report said
Yesterday, the U.S. ADP employment report was released, which can be considered as a "preview" of Friday's nonfarm report. The ADP report came out in the "green zone," stating the creation of 242,000 jobs in the private sector. This result was somewhat surprising, since most experts predicted a more modest increase of 180,000. But the actual result exceeded the analysts' forecast. It is worth noting that recently the report has shown a fairly high correlation with the official release, so the good February figures from ADP suggest that the main components of the release tomorrow will please dollar bulls with a "green color."
Preliminary forecasts for February Nonfarm Payrolls also suggest that the U.S. labor market will not disappoint, at the very least. Unites States unemployment should remain at January levels, i.e., at 3.4%. The nonfarm payrolls growth figure should show a more modest result than the previous month, but we should not forget that there was a half-million gain in January. February is expected to see an increase of 205,000. The private sector of the economy is projected to grow by 210,000. In light of Powell's recent statements, the wage component of the release is especially important. According to forecasts, the salary index should resume growth, rising to 4.7%, after the January decline to 4.4%. The trend itself will be important here, as with the major inflation indicators (CPI, core PCE index).
Conclusions
If nonfarm data comes out in the green zone on Friday, the dollar will again strengthen its position throughout the market. A strong report would suggest that the Fed will accelerate the pace of rate hikes at its March meeting and announce a hawkish stance on the prospects of monetary tightening. We are talking about an almost guaranteed 50-point interest rate hike in March. The regulator may also revise the level of the final rate—tentatively to 5.5% (possibly up to 5.75%).
And while much will depend on the dynamics of the February and March inflation indicators, this scenario looks the most realistic. According to the CME FedWatch Tool, the likelihood of the 50-point scenario materializing in March is now nearly 75%. As to further prospects, the market is still fluctuating. As of today, the probability of a 25-point rate hike in May is 59%, while the 50-point increase is 25%.
In anticipation of such a significant release, it is advisable for traders of the EUR/USD pair to maintain a wait-and-see attitude. Nonfarm data can strengthen the U.S. currency, provoking another dollar rally. But they can also put pressure on the greenback.
From the technical point of view, the pair on the daily chart is between the middle and lower lines of the Bollinger Bands indicator, as well as below all the lines of the Ichimoku indicator. It is important for the EUR/USD bears to consolidate below the lower line of the Bollinger Bands (i.e., below 1.0520) – in this case, they will be able to test the area of the 4th figure, and in the future – the 1.0450 support level (Kijun-sen line on the same timeframe).
