The euro/dollar pair is declining for two consecutive days: it reversed after updating its two and a half year price high at 1.2349 on Wednesday, and is now heading below the level of 1.22. The current dynamics is not only because of the US dollar's general strengthening. The EUR/USD bears also take advantage of the euro's weakness, which began to actively lose its positions throughout the market after the release of inflation data. However, there is no need to rush into trading decisions yet, as Nonfarm data will be published during today's US session, which may affect investors sentiment, especially if they find themselves in the sell area. The preliminary forecasts were also unsatisfactory – most experts expect unemployment growth and wage decline.
Now, let's start with the published European data. Inflation indicators were clearly disappointing, although it was difficult to expect other results due to the reintroduction of lockdowns in the UK. Thus, December's general consumer price index remained at the same level as it had been during the previous three months, that is, at -0.3%. This inflation indicator fell to the negative zone back in August last year, and has not left it since then. The core index also stayed around 0.2%. In particular, retail sales were disappointing: the indicator fell to -6.1% in monthly terms. The situation was only worse in March-April 2020, at the peak of the coronavirus crisis. It is obvious that consumer activity of Europeans significantly declined, which affected retail sales figures amid the second wave of the pandemic and widespread lockdowns.
In view of such tendencies, the euro declined all over the market – not only in pair with the US dollar, but also in the main cross-pairs. The dollar, in turn, received temporary support from significant American events, primarily the Capitol attack. It was reported that the death toll has increased to five. This surprising event increased the demand for the US currency as a protective asset. In addition, the Democrats are demanding to remove Trump from office, despite the fact that Joe Biden's inauguration is in less than two weeks. The factor of political instability provides background support to the USD.
On another note, U.S Nonfarm will be the most significant event today. The November figures have already reflected the negative impact of the second wave of COVID-19, but only partially. Here, the number of people employed in the non-agricultural sector in November increased by 245,000 after the previous growth by 610,000. In the private sector, it increased by 340,000, followed by the manufacturing sector with a growth of 27,000.
The unemployment rate slightly declined – from 6.9% to 6.7%. However, it should be considered that Nonfarm are two weeks behind the reports on applications for unemployment benefits. It can be recalled that this figure has fluctuated in the range of 790-860 thousand over the past five weeks. Yesterday, this indicator came out slightly better than expected (+787 thousand), but this does not change the essence of the matter. For several months (since mid-spring of last year), this indicator has been steadily and consistently declining, but it began to grow again at the end of autumn which is amid the growing COVID-19 cases in some states and local lockdowns.
Therefore, the December Nonfarm are likely to reflect the peak of the second wave of the coronavirus crisis in the US. Based on preliminary forecasts, the unemployment rate will rise to 6.8%, while the number of employed will grow by only 60 thousand. At the same time, the level of average hourly wages is expected to decline to 0.1% on a monthly basis. These numbers are not tragic, but they will serve as another reminder that the pandemic continues to have a negative impact on the US economy. If the above indicators come out at the forecast level, the dollar will be under background pressure. However, if the actual figures do not match the expectations, the volatility of the pair will be much higher. The direction of the price movement will depend on whether the release is in the "red" or "green"zone.
In general, the upward trend of the EUR/USD pair remains, despite a significant corrective pullback. The first support level is located at 1.2190 (Kijun-sen line on the daily time frame). However, a trend reversal is only possible if the pair breaks through a stronger support level of 1.2100 (lower line of the Bollinger Bands in the same time frame). Based on today's publication, we can consider long positions with the main target of 1.2320 (upper line of the Bollinger Bands in D1), but only if the pair is not below the 21st mark.