The US Nonfarm Payrolls report did not support the greenback. Traders interpreted the contradicting data as negative for the USD, although in this case, the scale could have tipped the other way. However, the market conditions played a nasty trick on the US dollar.
Throughout most of the week, market participants followed the principle of "buy the rumor..." (regarding the greenback) amid a strong report from the ADP agency and the overall risk-off sentiment. But to the disappointment of dollar bulls, immediately after Friday's release, the market followed the second part of the aforementioned trading principle - "...sell the news." Soon after the data was published, the US dollar came under pressure - within just a few hours, the dollar index dropped from 102.43 to 101.62. Considering that many components of the data came out in the "green," a legitimate question arises - can we trust the current weakness of the greenback?
In my opinion, the current market reaction is primarily emotional. Therefore, making decisions at that moment was not advisable - there is a risk that traders will close their positions towards the end of the US Friday session to avoid leaving open positions over the weekend. While the data itself cannot be considered disappointing, there are some aspects that might be seen as less favorable. Therefore, the impact of the July Nonfarm Payrolls was still likely to be felt - but not on Friday, considering the notorious "Friday factor."
It seems that traders were primarily disappointed by the fact that the non-farm payrolls increased, which only rose by 187,000 instead of the expected 205,000. This indicator has fallen short of the 200,000 mark for the second consecutive month (the June figure got revised lower to 185,000), indicating rather troubling trends. Private employers hired 172000 workers in June compared to forecasts of 190,000.
All other components of the report either met the forecast or were in the "green."
In my opinion, the US dollar became a victim of traders' overly high expectations: over the past few days, the dollar was getting stronger, fueled by hopes of "unconditionally strong" Nonfarm Payrolls. The ADP report also did a disservice as it surprised investors on Wednesday with its "green color": the result was double the estimated number (forecast - 180,000, ADP report - 324,000). Obviously, traders of EUR/USD were hoping for the Nonfarm Payrolls to exceed forecasts, considering the dynamics of unofficial data.
However, EUR/USD buyers should not fall into euphoria, as the July Nonfarm Payrolls was not a complete disappointment. For example, the "headline" indicator of the report came out positive. The US unemployment rate in the past month declined to 3.5%, showing a consistent downtrend for the second consecutive month. According to preliminary forecasts, this indicator was expected to remain unchanged at 3.6%.
But the most important thing for the US dollar bulls is the "green color" of the pro-inflationary indicator. The average hourly earnings rose 0.4% for the month, while experts expected it to decline to 4.1%. This indicator has been at the 4.4% mark for the fourth consecutive month.
In light of the outcome of the recent Federal Reserve meeting, this circumstance (active wage growth) plays a significant role. Obviously, the persistent inflationary pressure will provide support to the US dollar (after the initial market emotions subside), as wages will continue to exert pressure on core prices.
All of this indicates that traders should not trust the upward momentum: the pair is growing on rather shaky grounds.
It is necessary to recall that following the July FOMC meeting, the Fed left the door open for more rate hikes. According to Fed Chairman Jerome Powell, the September meeting may end with either another rate hike or keeping it at the current level. However, he emphasized that the central bank will assess all macro data in the fall "with a particular focus on progress in inflation." Active wage growth in this context is a clear argument in favor of the US currency.
Thus, although the USD plunged after the Nonfarm Payrolls, rushing into long positions on the EUR/USD pair was not advisable. We saw a somewhat distorted picture ahead of the weekend, so it was better to stay out of the market on Friday. Alternatively (though this is a riskier option), one could have considered short positions at current levels, with targets at 1.0950 and 1.0910 (the middle and lower lines of the Bollinger Bands indicator on H4, respectively).
