Key US stock indexes have stalled near record peaks, which is not surprising, as the market enters September – the worst month of the year for stocks in the last two decades, according to statistics.
There are still enough reasons for concern.
The prospects for tightening the Federal Reserve's monetary policy are still vague, while the Delta coronavirus strain threatens to become a deterrent for stocks in the event of a reduction in consumer spending or the introduction of new restrictions.
A similar picture is observed in the foreign exchange market, where the greenback cannot determine the direction of movement, fluctuating between gains and losses, and the EUR/USD pair is increasingly stuck in the range, and it is still unclear whether it will have enough strength to exit it.
On Tuesday, the USD index sank to the lowest levels since August 6, but then it was able to recover to 92.65 points following an increase in the yield of long-term US government bonds.
The day before, the indicator for 10-year treasuries rose to 1.303% from 1.284% recorded on Monday.
Meanwhile, the EUR/USD pair fell to 1.1810 after touching almost four-week highs around 1.1841, as financial managers adjusted their portfolios at the end of the month.
The single currency failed to move significantly above $1.18, even despite hawkish comments from European Central Bank officials and data released on Tuesday, which reflected that inflation in the eurozone rose to 3% on an annualized basis in August. This is the highest figure in a decade and above the ECB's target of 2%.
Robert Holzmann, the head of the Central Bank of Austria, said that the European regulator was in a situation where it could think about reducing emergency bond purchases, and added that he expects to discuss this issue at the September meeting of the ECB Governing Council.
The eurozone economy is growing faster than the ECB expected, paving the way for a possible rejection of abundant stimulus, ECB Vice President Luis de Guindos said.
"In 2021, the eurozone economy performed better than we expected, and this will be reflected in the forecasts that will be published in the coming days. If inflation and the economy return to normal, according to the logic of things, there will be a gradual normalization of monetary and fiscal policies," he said.
The next meeting of the ECB will be held next week, but for now the minds of investors are still occupied by the Fed.
The cautious tone of the comments of Fed Chairman Jerome Powell during his speech at the symposium in Jackson Hole caught the dollar bulls by surprise, provoking a corrective movement in the USD to multi-week lows around 92.40.
Further down, 91.78 (the low of the end of July) and 91.61 (the 100-day moving average) follow.
"The dollar's upward trend has ended, at least for the time being, after Fed Chairman Jerome Powell successfully separated the discussion about the timing of stimulus cuts from any decisions on higher interest rates," National Australia Bank strategists said.
Apparently, Powell did not want to incur accusations that the US central bank has moved to tighten monetary policy at a time when economic growth in the country has probably started to slow down, and a repeat of the same fiscal expansion as last year looks almost impossible.
The increase in the number of cases of COVID-19 has already led to a drop in consumer confidence in the United States to February levels, and this caution may soon affect demand.
According to the Conference Board, in August, the consumer confidence index in the country fell to 113.8 points from 125.1 points recorded in July.
"Although the resumption of COVID-19 and concerns about inflation have weakened confidence, it is too early to conclude that this decline will lead to consumers significantly reducing their spending in the coming months," the representatives of the Conference Board said.
Now market participants will closely monitor the monthly data on US employment, which will allow us to assess the pace of economic recovery and give hints about the next steps of the Fed.
"The employment data will be the next event, given the focus on reducing QE by the Fed. The strong data will raise expectations that the central bank will notify the markets in advance of the curtailment of monetary stimulus in September before the official decision in November. Weaker jobs data due on Friday may instead strengthen the case for further delay – a preliminary announcement in November and an official decision in December," said strategists at Daiwa Securities.
"Powell did not provide any new information at the Jackson Hole symposium, which makes the market wait for monthly data on the number of jobs in the non-agricultural sector of the United States. This is reflected in the fact that the dollar does not show a directional movement," Barclays analysts said.
They believe that steady employment growth will continue in August, which should help the Fed to continue discussing the issue of reduction, which in turn will lead to an increase in the USD exchange rate.
Commerzbank, on the contrary, sees opportunities for a further fall in the greenback if Friday's report on US employment does not meet market expectations.
"The more obvious the signs become that the US economic recovery is slowing down, the less the Fed will have a desire to hurry up with tightening monetary policy," the bank's analysts say.
According to them, this may lead to a smoother curtailment of asset purchases by the US central bank and a delay in a potential rate hike.
Commerzbank predicts that the greenback will probably weaken by the end of the year, as the foreign exchange market will need to reconsider its expectations regarding the Fed's curtailment of QE and push back the prospect of an increase in interest rates by the regulator, as the COVID-19 delta option will hit the US economy. At the same time, high inflation in the country will affect the purchasing power of the dollar for a longer time.
In August, the number of jobs in the US private sector decreased by 374,000, according to the Automatic Data Processing (ADP) report published on Wednesday. Analysts expected an increase in the indicator by 650,000.
"We are seeing a reduction in the number of new employees after a significant increase in the number of jobs in the first half of the year. Despite the slowdown, job growth is approaching the 4 million mark, but the figure is still 7 million less than before the COVID-19 pandemic," ADP economists said.
Investors have yet to find out whether this report is a harbinger of weak payrolls, since ADP greatly underestimated the dynamics of employment a month earlier.
However, after the release of this data, the greenback came under pressure and again dipped below the 50-day moving average at 92.50.
Taking advantage of the weakening US currency, the EUR/USD pair increased its gain above 1.1800. It still stays above the 50-, 100- and 200-day moving averages. This suggests that, in general, the bulls are in control of the situation.
"EUR/USD recently closed above the short-term bearish trend and completed the Falling Wedge reversal pattern. It could then target the July high at 1.1909 and the 1.1990-1.2005 area. On the other hand, support is at 1.1704 (March low), and further - at 1.1664 (recent low) and 1.1576 (200-week moving average),"- noted in Commerzbank.
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