Euro has every chance of rising as recent data from the US hints at a possible recession in the country by next year.
Activity indices in the US remained in negative territory, below 50 points, which is very bad. The first one that was hurt was the real estate market, followed by the service sector and the manufacturing sector. The only one that is still holding on is the labor market, but last week Fed Chairman Jerome Powell said he will make use of wages to fight inflation.
Wages have a very large impact on inflation as they are a particularly large item of expenditure. According to Powell, the labor market will be the key to a further rise in inflation, so something must be done about it. Right now, wages are rising much higher, which is not in line with the Fed's policy of returning to 2% inflation.
The key question for Fed officials is whether the sharp rise in US wages over the past 18 months is a one-off action, or whether, after companies have adjusted to labor shortages, higher cash wages will be the norm. If this is the case, Powell can maintain a tight monetary policy. Forecasts published by the Fed last week already suggested that the key rate for next year could hit 5.1%, which is higher than the expected value. This led to the stock market crashing down.
Labor shortages, which were caused by coronavirus-related constraints, have provided more opportunities for employers and workers to raise wages as competition for hiring intensified. But in most cases, households have barely kept up with the rising cost of living. As the figures show, total employer payroll spending increased by 5% in the 12 months to September, up from 3.7% a year earlier.
Although earlier wages were not a big part of the story, now that companies are trying their best to retain employees, it is likely that the central bank will take a closer look at what is happening in the labor market and not just regulate its level.
Talking about the forex market, demand for euro is still weak, but there is a chance for a return to December highs if the European Central Bank retains its hawkish monetary policy. However, traders need to keep the quote above 1.0660 because only by that will euro hit 1.0700 and 1.0740. In case of a decline below 1.0580, pressure will surge, which will push the quote to 1.0540 and 1.0490.
In GBP/USD, trading is taking place within the sideways channel, so buyers need to break above 1.2200 in order for the quote to rise to 1.2250 and 1.2301. But if sellers take control of 1.2130, pound will fall to 1.2070 and 1.2000.