The calm always comes before the storm. Ahead of the publication of the FOMC June meeting minutes and the release of the most important statistics on the U.S. labor market, the EUR/USD is treading water. The pair has been closing around 1.09 for several days now, though the fluctuations throughout the day are far from boring. Roller coaster-like movements recur again and again due to the closing of positions on the eve of key events in July.
Meanwhile, hedge funds are actively getting rid of dollars. For the week ending June 27, they reduced their longs on the greenback against eight major global currencies by more than 4/5. The indicator fell to its lowest level since March 7. Despite Jerome Powell's talk of two federal fund rate hikes, speculators don't believe him. There's a sentiment in the market that the Fed simply won't be able to do this.
Dynamics of the USD index and speculative positions on the dollar
However, the mass unwinding of longs on the U.S. currency occurred even before the release of statistics on durable goods orders, consumer confidence, and GDP. Strong data indicate the stability of the U.S. economy and allow the Fed to continue the monetary tightening cycle. It can lead to an increase in the yield of 10-year treasury bonds from current levels around 3.75% to 4.5%. This opinion was shared by the former president of the New York Fed, William Dudley.
The higher the debt market rates, the more attractive American assets look. The influx of capital from abroad will support the U.S. dollar. These processes are happening right now. It's no wonder that Nasdaq Composite has grown by 32% since the beginning of the year, which has been its best half-year performance since the 1980s. S&P 500 has added 16%.
Thus, EUR/USD faces a dilemma: should it trust the Fed or speculators who don't believe in the central bank? Simply put, to what level will the federal funds rate rise? To 5.5% or to 5.75%? A hint may be given by the U.S. labor market statistics for June. Bloomberg experts forecast an employment increase of 225,000, albeit the lowest figure in recent months, it still indicates a healthy economy.
US non-agricultural employment dynamics
Bloomberg disagrees with this. In its opinion, the soft landing scenario preferred by most investors is unlikely. Allegedly, the key source of U.S. resilience to aggressive Fed monetary policy tightening in the form of household savings is rapidly melting. The number of defaults on loans and bankruptcies in small business is increasing rapidly in the U.S.
Thus, there are many opinions in the market. Investors are eagerly awaiting hints from U.S. employment.
Technically, on the daily chart, EUR/USD is undergoing short-term consolidation. Purchases can be talked about in case of a successful assault on resistance at 1.0935. On the contrary, the inability of the "bulls" to return above the fair value of 1.092 indicates their weakness and is a reason for selling.