The greenback was under bearish pressure for most of last week, and the EUR/USD pair was steadily going up, as market participants have already begun to consider the European Central Bank's further steps in a more hawkish way, while reducing the likelihood of an early reduction in monetary stimulus from the Fed.
On Friday, the USD index fell below 91.94 for the first time since August 4 after a report on the US labor market for the last summer month showed that the world's largest economy created the fewest jobs in seven months – 235,000.
Against this background, the EUR/USD pair jumped above 1.1900, and it was already a matter of time before the bulls took the level of 1.2000.
However, then the scales tilted to the bears' side, and the main currency pair retreated, finding support in the area of 1.1880 and ending the last five days near this mark.
Apparently, market participants decided not to force events ahead of the ECB's September meeting.
At the same time, the greenback received unexpected support from concerns about the slowdown in economic growth in the United States and, as a result, in the whole world. This has increased the appeal of the dollar as a safe haven asset.
In addition, there were some offsetting factors that mitigated the disappointing NFP headline for August.
Although the number of new jobs in the US non-agricultural sector in August was less than expected by almost 500,000, the figure for the previous month was revised up by 110 thousand, to 1,053,000. Unemployment in the country fell to 5.2%, reaching the lowest level since March 2020. Average hourly wages increased 0.6% on a monthly basis, the fastest growing in four months.
These numbers helped the USD index to move away from a monthly low and allowed market participants to interpret the miss in Friday's employment report as a delay in the Federal Reserve's announcement of a quantitative easing cut, and not as a complete removal of the issue from the agenda.
In addition, given the powerful surge in the incidence of COVID-19 in the United States in August, the numbers were not so bad.
The main culprit for the weakness of the payrolls was the Delta strain, but the US reports on the coronavirus since the last week of August began to look much more optimistic. This allows us to hope that the next wave of COVID-19 in the United States has peaked, and the next report on the national labor market will be strong.
In addition, the deadline for paying additional unemployment benefits in the country expires this month, which is another reason to wait for the situation to improve, starting from September.
Statistics on the US labor market for August may force the Fed to be more cautious about curtailing stimulus measures, analysts at Aptus Capital Advisors believe.
"The economic recovery in the US is still stable, but the situation in the national labor market is not improving so quickly as to justify a faster tightening of monetary policy in the country," they said.
Friday's data on US employment, which showed that only 235,000 jobs were created last month against the projected 728,000, may be enough to reduce the chances of the Fed announcing a reduction in QE this month, NatWest strategists say.
Now investors will be watching the reaction of Fed officials regarding the August data on US employment, and it will not take long to wait, since a number of representatives of the central bank will speak on Wednesday and Thursday.
The greenback started the new week on a positive note, managing to move even further away from its recent lows below 92.00 and leaving the EUR/USD pair under pressure.
On the one hand, the August release on jobs in the United States weakened expectations that the Fed may take a more hawkish position at the meeting at the end of September, on the other hand, it served as a basis for worries about the fate of the global economy, the slowdown of which is a serious obstacle for such cyclical currencies as the euro.
The optimistic report that was published in Germany did little to impress the bulls on EUR/USD or provide any support to the pair.
According to Destatis, the volume of orders of industrial enterprises in Germany increased by 3.4% in July compared to the previous month. The indicator reached the highest value since the beginning of data collection in 1991. Analysts expected the indicator to decline by 1%.
At the same time, the Sentix research group reported that in September, the investor confidence index in the euro area sank to 19.6 points from 22.2 points recorded a month earlier.
The EUR/USD pair ignored this data. On Monday, it failed to resume growth and spent most of the day in a narrow range of 1.1860–1.1870, closing yesterday in negative.
On Tuesday, the greenback rose for the second day in a row, and the EUR/USD pair took another step back, approaching the lower limit of the range (around 1.1835), in which it has been trading since the beginning of the month. This happened after an attempt to rebound above 1.1880 was not continued.
The return of interest in the dollar is to some extent due to a moderate increase in long-term yields in the United States.
The indicator for 10-year treasuries, which was about 1.29% before the publication of US employment data on Friday, is now approximately equal to 1.38%.
This serves as a tailwind for the US currency and holds back any significant growth of the EUR/USD pair.
The USD index continued to recover on Tuesday, rising above 92.40 points. The next target of the dollar bulls may be the 55-day moving average around 92.50, then the resistance is at the level of 93.20.
It is assumed that the greenback will remain positive as long as it is trading above the 200-day moving average, which currently passes near 91.30.
Meanwhile, the main currency pair continued to bear losses, testing the strength of support at 1.1840, even though Eurostat improved its estimate of eurozone GDP growth in the second quarter to 14.3% in annual terms.
The increase in the yield of US Treasury bonds prompted investors to reduce short positions on the dollar against the euro before the ECB meeting, which will be held this week.
With the eurozone economy reviving, the central bank will discuss the curtailment of stimulus measures on Thursday, starting a tense and lengthy discussion on how to cancel measures to combat the crisis that kept the currency bloc afloat.
It is still unclear whether there is a majority in the ECB Governing Council on the gradual reduction of monetary stimulus. This, in turn, deters traders from aggressive bets, requiring some caution before confirming that the recent strong rebound of the EUR/USD pair from the lows since November last year has run out of steam.
"If at its meeting on Thursday the ECB expresses a somewhat firmer than expected intention to reduce stimulus, the main currency pair may jump up, but will remain in the range limited from above to the area of 1.1900, until the market takes it significantly above 1.2000," noted the strategists of Saxo Bank.
"We believe that the ECB will announce a reduction in purchases under PEPP in the fourth quarter, which will partly reflect the softening of conditions in the financial sector. All other instruments will be left unchanged against the background of revised inflation forecasts for the current and next years. At the same time, ECB head Lagarde will most likely want to avoid hawkish rhetoric," TD Securities experts said.
They believe that the EUR/USD pair testing the 1.2000 mark in the coming months is more likely than a fall to 1.1500.
The euro may test $1.20 (the highest level since the end of June) this week, but this may require a bigger surprise from the ECB than many now expect, analysts at Societe Generale say.
"This surprise will allow the EUR/USD pair to break out of the current range," they said.
The single currency is likely to go up if the ECB announces a reduction in monthly asset purchases, but this is unlikely to last long, Rabobank analysts believe.
"Christine Lagarde is likely to seek to maintain the reputation of a dove and may try to avoid using the term "taping" altogether," they said.
The EUR/USD pair risks correcting lower if the ECB does not announce a reduction in asset purchases on September 9, according to ING.
"The risks are shifted towards the decline of the main currency pair, because it has grown significantly, and the ECB, as we think, will not meet the expectations of the bulls," experts from Aberdeen Asset Management noted.
Against the background of increased demand for the dollar, the EUR/USD pair is forced to be on the defensive. However, only a break below 1.1815 (55-day moving average) will make the pair's mood bearish and allow the beats to aim for this year's lows near 1.1665, and then the lows of October 2020 near 1.1610.
On the other hand, the mark of 1.1910 (monthly high) is a key obstacle for bulls of the pair, followed by 1.1950 (100-day moving average) and the psychologically important level of 1.2000.
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