The labor market disappointed the US dollar yesterday, which sharply declined against the euro and the British pound.
As the data showed, the US unemployment rate rose again in September to 4.4%, significantly weakening the US dollar. The rise in unemployment is not just a statistic; it reflects the real difficulties faced by millions of American families. Layoffs, salary reductions, and loss of health insurance all exert tremendous pressure on consumer spending and, consequently, on economic growth.
Now, the central bank faces a difficult dilemma: support the weakening economy by lowering interest rates or keep inflation under control by maintaining the current rates. Lowering interest rates would undoubtedly make loans more accessible, stimulating investments and consumer spending. However, this could also lead to further weakening of the dollar and possibly a rise in inflation.
In the first half of the day today, data on the manufacturing PMI index for the Eurozone, the services PMI index, and the composite PMI index are expected. Shortly afterward, European Central Bank President Christine Lagarde will give a speech. These events will undoubtedly be crucial for determining the short-term dynamics of the euro. The PMI index, or Purchasing Managers' Index, is a leading indicator of the economic health of the region. Its values reflect the sentiment of key players in the economy—purchasing managers—and provide valuable information about the current state of affairs in the manufacturing and service sectors. A drop in the index below 50 signals a contraction in business activity, while exceeding this level indicates growth. Lagarde's speech, on the other hand, will provide a unique opportunity to receive direct comments from the ECB's head on the current economic situation and the central bank's future plans. However, considering that the central bank does not intend to change its monetary policy in the near future, Lagarde's statements are unlikely to significantly influence market sentiment.
As for the pound, several important reports are also expected in the first half of the day. The market eagerly awaits retail sales data, which serves as an initial signal of consumer demand. This is particularly relevant in the context of current inflation and concerns about a potential economic slowdown. The PMI indices, in turn, will provide a broader picture of the state of affairs in the manufacturing and services sectors. The composite PMI index, which combines data from these two sectors, will be a key indicator of the UK's overall economic health.
If the data aligns with economists' expectations, it is better to act based on the Mean Reversion strategy. If the data is significantly higher or lower than economists' forecasts, it is best to use the Momentum strategy.
Momentum Strategy (Breakout):
For EUR/USD Pair
- Buy on a breakout above 1.1541, which may lead to an increase in the euro toward 1.1564 and 1.1595.
- Sell on a breakout below 1.1530, which may lead to a decline in the euro toward 1.1500 and 1.1480.
For GBP/USD Pair
- Buy on a breakout above 1.3100, which may lead to an increase in the pound toward 1.3125 and 1.3165.
- Sell on a breakout below 1.3085, which may lead to a decline in the pound toward 1.3055 and 1.3030.
For USD/JPY Pair
- Buy on a breakout above 157.30, which may lead to a dollar increase toward 157.70 and 158.15.
- Sell on a breakout below 157.05, which may lead to a sell-off of the dollar toward 156.67 and 156.23.
Mean Reversion Strategy (Retracement):
For EUR/USD Pair
- Look for sales after a failed breakout above 1.1546 and a return below this level.
- Look for purchases after a failed breakout below 1.1531 and a return to this level.
For GBP/USD Pair
- Look for sales after a failed breakout above 1.3102 and a return below this level.
- Look for purchases after a failed breakout below 1.3071 and a return to this level.
For AUD/USD Pair
- Look for sales after a failed breakout above 0.6465 and a return below this level.
- Look for purchases after a failed breakout below 0.6440 and a return to this level.
For USD/CAD Pair
- Look for sales after a failed breakout above 1.4099 and a return below this level.
- Look for purchases after a failed breakout below 1.4079 and a return to this level.
