Markets calmly responded to a report published on Friday on the US labor market, despite the fact that some indicators differed from forecasts.
The unemployment rate in September fell to 3.7%, which is less than predicted, but does not cause much concern in the markets. According to the Fed's forecasts, next year, the unemployment rate will decrease next year to 3.5%, and therefore, any fluctuations exceeding this level will be perceived calmly.
The same effect is observed on non farm. Despite the fact that only 134 thousand new jobs were created in September, which of course came as a surprise after a strong ADP report the day before, the markets reacted calmly. First, some time ago, it was suggested that Hurricane Florence would play its role, that is, the markets were ready for weak data, and, secondly, the figures for August and July were revised upwards by 87 thousand, which compensated September weak results.
More attention was focused on the average wage growth rate, since inflation expectations are directly dependent on this indicator. Wage growth turned out to be worse than predicted, but even here, the reaction of the markets was surprisingly calm, since a slightly faster than expected decline in unemployment indicates the approach of a shortage of skilled labor, which ultimately will contribute to the growth of average wages.
In general, the report on the labor market must be recognized as neutral. In the short term, it led to a decline in stock markets and an increase in bond yields, which was reflected in a slight decrease in the dollar index, but in the longer term, the dollar is likely to continue to strengthen. This conclusion is generally confirmed by the CFTC Friday report, which showed some deterioration in the ratio of long and short contracts for the euro, franc, and Japanese yen in favor of the dollar, while for commodity currencies, on the contrary, there is some improvement. In conjunction with the dynamics of oil and gold futures, which showed an increase in demand for raw materials and a decrease in defensive assets, we can assume that the markets still do not see the threat of large-scale collapse, despite a rather noticeable drop in stock indexes last week.
Against the background of the labor market report, the report on foreign trade for August, which showed an increase in the trade balance deficit to 53.2 billion dollars from 50 billion and in July, went to the second place, this is the worst indicator since February. Imports increased by 0.6% and reached a historical record, while exports fell by 0.8%, and the foreign trade deficit with China again increased to 38.6 billion against 36.8 billion a month earlier, which indicates the ambiguous prospects for a trade war.
Overall, the dollar is positive for the current week. Despite the problems with the fullness of the budget. This factor is not yet regarded as alarming by the markets, but the prospects for growth rates and the implementation of the schedule of the Fed to reduce the balance will push the US currency up.
China resumed trading after a week break, the PMI Caixin index in the service sector for September was unexpectedly strong, rising to 53.1p against 51.5p indicating that the future winner in the trade war is still far from certain. Good data supports commodity currencies and reduces tensions.
EUR / USD
In the eurozone, the main focus of attention this week will be directed to negotiations on the formation of the budget of Italy. The revenue side of the budget is under question, the financing of the deficit by the ECB is hampered due to the reduction of the asset repurchase program, the budget needs to be submitted to Brussels by October 15, and fears that it will receive a negative assessment are growing. This factor will contribute to the pressure on the euro.
The euro starts the week under pressure, on Monday, the downward movement is likely to develop, the nearest support is 1.1430.
GBP / USD
In the absence of significant macroeconomic data, the pound may start playing rumors about progress in the Brexit negotiations. There is evidence that Britain is ready to remain in a customs union with the EU after March 2019, and the EU, in turn, will expand the proposal for a free trade zone.
The pound has a weak support of 1.3050, an attempt to update the opening level of the week and rise to 1.3055 looks more likely.
The material has been provided by InstaForex Company - www.instaforex.com