We can draw two conclusions following the outcome of the Federal Reserve's November meeting. The first conclusion is the Fed's willingness to resort to additional interest rate hikes. The second conclusion is the exact opposite of the first. It boils down to the fact that the Fed views further tightening of monetary policy as a forced and clearly undesirable measure. Such mixed signals from the Fed have confused traders of dollar pairs, including EUR/USD traders.
On Wednesday, sellers of the EUR/USD pair were staying near the base of the 1.05 level, reflecting bearish sentiments. However, the bulls have already tested the resistance level at 1.0650 (the upper line of the Bollinger Bands on the daily chart), taking advantage of the greenback's weakness. We should be cautious with such impulsive price surges, especially considering that the euro is not in its best shape. Among the major reasons are the sharp slowdown in eurozone inflation (from 4.3% to 2.9%) and an unexpected contraction of the European economy (the eurozone was pulled down by Germany, which also fell in the third quarter).
In such conditions, it can be said that the current rise in EUR/USD is solely due to the dollar's weakness. The single currency remains vulnerable, given the negative fundamental backdrop, which is now exacerbated by weak labor market data in Germany (unemployment rose to 5.8% in October, with an expectation of a rise of 14,000 in the number of unemployed).
As for the dollar, it's too early to write it off. The euro is rising because of the dollar's weakness, as the market, in a broad sense, "does not believe" in another Fed interest rate hike, despite the central bank leaving the door open for it. However, it's important to recall some of Fed Chair Jerome Powell's remarks following the November meeting. In particular, he said that he does not rule out the possibility of further rate increases in the foreseeable future. According to him, this will largely depend on inflation, but strong economic and labor market data "also leave room for rate hikes." Powell also reminded that two inflation reports and two labor market reports will be published before the next meeting, "which can significantly impact the central bank's opinion."
Preliminary forecasts predict weak results for the Non-Farm Payrolls (NFP) report. According to most experts, the unemployment rate in October is expected to remain at the September level (3.8%). This rate was seen in both September and August after dropping from 3.5% in July. The number of non-farm payrolls is expected to increase by 182,000, which is a relatively modest result, and it will fall below the 200,000 mark (as it's known, a monthly increase of more than 200,000 signifies acceleration in the labor market). In the private sector of the economy, a very modest increase is also expected, with only 145,000 jobs added.
The average hourly earnings are expected to be at 4.0% in year-on-year terms. This indicator stayed at 4.4% for four months from April to July. In August, it dropped to 4.3%, and in September, it fell to 4.2%. If the October figure meets the forecast, it will confirm the downward trend and set a more than two-year low (the lowest growth rate since August 2021).
As we can see, preliminary forecasts don't bode well for the dollar. Take note that the report from the ADP agency was in the "red zone." According to their estimates, the number of jobs in the private sector increased by only 113,000. However, ADP data has often not correlated with official figures, so relying on this release may not be advisable.
In conclusion, the NFP report has the potential to stop the EUR/USD pair's upward movement because this growth is based solely on the greenback's weakness. The dollar's weakness is due to a decline in hawkish expectations regarding the Fed's future course of actions, whereas a strong labor market report can change this situation, but only if all components of the report show a positive outlook.
It's also worth noting that despite the impulsive rise, EUR/USD buyers were unable to consolidate above the 1.0650 resistance level (the upper line of the Bollinger Bands on the daily timeframe), and as a result, they retreated to the base of the 1.06 level. This is another argument against long positions, at least until the NFP report is published.
