The EUR/USD pair concluded the week at the level of 1.0787, reacting to the latest US labor market data. US nonfarm payroll employment far exceeded expectations, so the greenback easily regained its lost positions. The pair was approaching the 1.09 level just a few hours before the release, but the labor market data worked in favor of the US currency and saved the situation.
The EUR/USD weekly chart indicates a consistent downward trend for three consecutive weeks. Overall, the downtrend (including quite substantial bullish pullbacks) has been in place since the end of December. At that time, the pair reached a six-month high (1.1140), afterwards it reversed and has been sliding down ever since.
Take note that bears have tested the 1.07 level more than once, turning the greenback's impulsive growth in their favor. The problem lies elsewhere: sellers are not willing to go further – they take profits, thereby neutralizing all the previous achievements.
We don't know whether this will happen again. Judging by the dynamics of the downward movement on Friday, the pair could have fallen much deeper than 1.0787 if trading had continued into Saturday. However, the weekend has arrived, so the main intrigue now lies in a simple question: has the enthusiasm of Nonfarm Payrolls worn off, or has the dollar received long-term support? In the first case, the pair will likely experience a correction on Monday; in the second case, the price will drop towards the 1.07 level without any courtesies towards the bulls.
There is intrigue here, as the strong Nonfarm Payrolls, on the one hand, fundamentally reshaped the picture for the pair, significantly strengthening the greenback's position. On the other hand, the Federal Reserve's assessment is also important, and none of the central bank representatives have commented on the data yet.
A day before the Nonfarm Payrolls data was released, Fed Chair Jerome Powell said that the central bank would have to lower interest rates sooner in case the labor market gets weaker. While under the implementation of the baseline scenario (a strong economy, a strong labor market), the Fed "can afford" to be more cautious on this issue.
This is a rather vague statement that specifies the Fed's possible actions in case the U.S. labor market gets weaker. However, Powell's "baseline scenario" is being implemented, raising the question - what does "exercise caution in easing monetary policy" mean? Does this mean that the central bank will keep the rate at the current level in May? Or are the doors for a May cut still open, despite the strong Nonfarm Payrolls? And are the hawkish expectations of traders overstated, considering the fact that the Fed is ready to ease monetary policy this year, the only question is when exactly will the Bank start this process?
There are many questions, so the upcoming week will not be an "easy stroll" for dollar bulls. There are few important reports for the greenback - among the main ones, the ISM Non-Manufacturing Purchasing Managers' Index (February 5), U.S. trade balance data (February 7), and weekly labor market data (February 8). Therefore, traders of EUR/USD, as well as all other dollar pairs, will be focused on the rhetoric of Fed representatives.
On Monday, Fed Chair Jerome Powell will voice his position, as well as Atlanta Fed President Raphael Bostic. On Tuesday, Cleveland Fed President Loretta Mester. On Wednesday, Federal Reserve Board members Adriana Kugler and Michelle Bowman, as well as Richmond Fed President Thomas Barkin. On Friday, San Francisco Fed President Mary Daly.
If they tighten their rhetoric in response to the rise in the pro-inflation indicator (average hourly earnings increased by 4.5% in January, with a forecast of 4.1%), as well as the sharp increase in the number of employed (353,000, with a forecast of 187,000), the dollar will receive additional support. In this case, not only will the bears consolidate below 1.0800 but also open up new price horizons, with targets at 1.0750 and 1.0700. Considering the previous rhetoric of many of the listed Fed members, this is the baseline scenario. However, an alternative scenario is also possible, where all the Fed's hawkishness will be limited only to the March meeting (which is already clear), and the prospects for the May meeting will remain in question. In such a case, the dollar will lose its momentum again, and the bulls may bring the pair back into the 1.08 territory.
According to the CME FedWatch Tool, the probability of a rate cut at the March meeting is currently only 34%. As for the May meeting, the probability of a 25-point rate cut (assuming the status quo is maintained in March) is 59%. Hawkish/dovish messages from the Fed can adjust these scenarios, significantly affecting the greenback's positions. So, all eyes on the Fed!
