According to the labor report, the US economy added 315,000 new jobs in August, beating the forecast of 300,000 jobs and the downwardly revised reading for July of 526,000. The unemployment rate rose to 3.7% from 3.5%.
The US stock market tumbled on Friday as the US Treasury yield rose on assumptions that the US Federal Reserve will stick to its current monetary policy. Its main goal is to tackle inflation now while the economy is still strong and the labor market is robust and to bring it back to the target of 2%. Against this backdrop, the US dollar continues its rally against other major currencies. The only currency to withstand the pressure is the Russian ruble as it is supported by rigid control measures, low public debt, economic stability even amid western sanctions, and, of course, high prices for energy resources.
Despite all announcements made by the Fed and Jerome Powell himself, markets seem to doubt that the regulator will eventually continue its aggressive tightening. The current situation resembles the one from 2013 when the Fed "blinked" as traders say. Back then, it delayed aggressive measures and met the needs of the market. Most probably, some market participants still hope for such a scenario when the Fed will blink and postpone rate hikes. For example, after a rate hike of 0.75% or 0.50%, as many traders hope, the US regulator will announce that the pace of rate increase may slow down to 0.25% at the next meetings.
Yet, I think it is not a good idea to compare the situations in 2013 and in 2022. The reason behind today's unprecedented inflation lies in the coronavirus crisis in Europe and the United States and the massive stimulating measures that actually led to excess liquidity in the economy. Besides, the geopolitical factor and the standoff between Russia and the West delivered a hard blow to Europe due to soaring food and energy prices.
Therefore, the Federal Reserve is likely to stay committed to its goal of an aggressive rate increase. The September meeting will be pivotal in this case. If the rate goes up by 0.75% as expected and Powell confirms further hikes, then markets may face another massive sell-off wave and a flight to the US dollar.
As for the foreign exchange market, its state will depend on important manufacturing indicators and rate decisions of such central banks as the Reserve Bank of Australia, the Bank of Canada, and the European Central Bank. Besides, markets will pay attention to what Christine Lagarde, Jerome Powell, and some Fed officials are going to say this week. The week promises to be tense and highly volatile. Yet, the main focus of investors will be on the Fed's further plans. Any hints signaling that the regulator is not going to change its policy will send the stock market tumbling and the US dollar rallying.
Daily forecast:
EUR/USD
The pair found support at the level of 0.9900. There might be a slight upside movement ahead of the ECB meeting where the regulator is expected to raise the rate by 0.50% or even 0.75%. The European stock market may also provide some support to the pair as trading volumes are low today due to a public holiday in the US. If so, the pair may advance to 0.9975.
WTI crude
WTI crude is trading below the mark of 89.00 dollars per barrel. The quote may break through this level amid expectations that gas supplies to Europe will resume and OPEC+ will stick to its previous policy. If so, WTI may hit 91.00 dollars per barrel.