The US labor market continues to show results noticeably better than expected. New jobs were created in December with 312 thousand compared to the forecast of 180 thousand. Meanwhile, the two months were also revised upward by 58 thousand. The average hourly wage rose by 0.4% in December and year on year growth of 3.2% while the fact that the experts were waiting for a slowdown to 3.0%. The only negative factor is the increase in unemployment from 3.7% to 3.9%, but it also has a positive explanation. The increase in unemployment occurred against the background of a noticeable increase in labor force participation from 62.9% to 63.1%.
The market should have responded by a strong increase in demand for the dollar since the report indicates an increase in the likelihood of the economy overheating and the continuation of the Fed's tightening cycle. However, this didn't happen in reality, as Fed Chairman Powell, speaking a little later has actually devalued the strong labor market data by saying that the Fed is ready at any moment to stop reducing the balance if the markets consider liquidity to be a problem.
Powell also drew the attention of the audience to the fact that there are no signs of rising inflation, regardless of the strong growth of the labor market, which indicates that the Phillips curve value is overvalued, and wage growth can occur without price increases.
This statement is a significant necessity because the business does not really increase but lowers its inflation expectations. the yield on 5-year TIPS bonds again decreased to 1.46% this time, which is the minimum since October 2016. Market expectations on the rate also indicate more likely a decline in 2019, but not growth, which is at odds with the Fed's plans to raise rates twice this year. The CME futures see a one-time increase of only 3.2%, while the probability of a one-time decrease for the year is already more than 36%. In other words, both the inflationary expectations and the forecast for the labor market data did not make any impression, which means that the business is preparing for the scenario of approaching the recession.
Eurozone
The latest macroeconomic data does not look optimistic for the eurozone. The PMI Markit indices slowed down in December stronger than preliminary data on the services sector and in production, the preliminary inflation index in December was 1.6%, which is significantly lower than both the November 1.9% and forecast 1.8%. Part of the slowdown in consumer prices is due to lower oil prices but the outlook for core inflation also looks unconvincing since no upward trend is noticeable.
There are no signs of an improvement in the economic situation after a severe slowdown in 2018. Tendencies indicate that the ECB does not have any need to prepare for tightening monetary policy, that is, the probability of a rate hike in the summer of 2019 decreases and perhaps, expectations are postponed to December.
For the euro, the situation looks slightly worse than in mid-December, as the strong gap between the US ISM index and the PMI for the eurozone is not narrowing as quickly as expected. Again strong data on the US labor market suggests that the ISM slowdown will be short-lived. The euro still looks like a favorite in tandem with the dollar and will try to win back part of the many-month decline, but strong growth should not be expected.
On Monday, the EUR/USD is trading in a range with a slight upward trend. An attempt to rise to resistance 1.1455 and further to 1.1490 is likely to occur. A decrease to the support of 1.1375 is unlikely.
Great Britain
The debate on key voting in the House of Commons will begin on January 14th, hence, the situation with Brexit is still decisive. Voting will take place a little later, preliminary data indicate that Theresa May will lose, unless, of course, none of the parliamentarians change their minds.
On Friday, the pound was unexpectedly supported by a stronger-than-expected PMI index in the service sector for December, but overall, the fluctuations in the GBP/USD pair will be determined by news on the balance of power in parliament. On Monday, trading opened neutral as the pound is just below the resistance of 1.2750. If this level is surpassed, then an attempt to get to 1.2814 is possible, however, trading is more likely in the range close to the current levels.
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