Investors cannot get rid of the topic of high inflation in economically developed countries, which leads to restless movements in the markets amid high volatility.
Yesterday, the markets tried to recover from sales in the first half of the week, and they were quite successful at first. Europe traded on a positive note in the wake of previous statements by the ECB President C. Lagarde, who said that she did not see any reasons to start the process of raising interest rates, as well as generally good reporting by European companies. Futures on US major stock indexes were also in the "green" zone, but everything changed after the publication of data on the number of applications for unemployment benefits in the US, which turned out to be worse than expected, showing an increase of 268,000 against the forecast of 260,000. In addition, the previous values were also revised upwards to 269,000.
This news disappointed market participants again, reminding them of the ongoing problems in the US labor market. On this wave, the stock markets in Europe were under pressure, partially playing back the negativity from the States and fixing profits after the European continental indices reached local highs.
So why do investors continue to react nervously to weak statistics from America's labor market?
The main reason is the understanding that the need for the Fed to start raising interest rates in the future in view of the weakness of the US labor market can only strengthen the negative trends in the American economy, which, having not emerged from the crisis of 2008-09, is falling into a new systemic crisis that can radically change the country. The prospect of an increase in interest rates looms before the eyes of market players all the time, which will lead to a noticeable correction in the local stock market.
Apparently, the topic of rising rates will not leave continental Europe either. According to the latest data, a strong increase in UK inflation to 4.2% has already caused talk that the Bank of England will not remain indifferent and will raise rates in the same way as the Fed. We believe that with inflation at 4.1%, the ECB will also be forced to follow its path, which will force investors to be cautious, and this will manifest itself in the form of high volatility.
Why did the US dollar decline on Thursday?
The US currency corrected against a basket of major currencies on Thursday. This is caused primarily by the local strengthening of the euro and the pound due to increased expectations of a possible start of rate hikes in the Eurozone and Britain amid rising inflation. But in general, while the leaders of the European and British Central Banks do not specify their views on the future course of monetary policy, the US dollar will remain in favor due to the real possibility of a rate increase at the beginning of next year if inflationary pressure in America increases.
In conclusion, it is worth noting that investors are ahead of difficult times, high volatility, and a rather long period of uncertainty. We believe that this condition will most likely continue until the new year.
Forecast of the day:
The EUR/USD pair failed to reach the local target level of 1.1385 and shows a downward reversal at the opening of the European trading session. Its decline below the level of 1.1335 may allow the pair to further fall to 1.1275.
The GBP/USD pair is also showing a local downward reversal. A decline below the level of 1.3460 will lead to a price decline to the level of 1.3400.