The surge in risk aversion and the rise in Treasury yields are the two main reasons the dollar is trying to strengthen its position this week. It is necessary to note immediately: the greenback is growing on shaky grounds, while many other fundamental factors do not contribute to the revaluation of the American currency, but rather the opposite.
However, as we can see, the emotional swings on which traders "ride" have helped the dollar return to form. The slowdown in inflation in the United States, the decline in hawkish sentiments, and the rise in dovish expectations—all of this remained in the shadow of loud events in the Middle East. The autumn story is repeating itself—geopolitics is once again "ruling" the currency market. However, despite the peculiar familiarity, the ending of this story is unpredictable, as is the conclusion of any military conflict.
The EUR/USD pair finished the trading day yesterday at 1.0836, below the support level of 1.0850 (the middle line of the Bollinger Bands indicator on the daily chart). Overcoming this price barrier, sellers indicated their claims for the 1.07 level, so it's not surprising that today, the price started sliding down again, reflecting increased demand for the American currency.
Nevertheless, I express my confidence that for the EUR/USD bears, a "smooth walk downward" will not happen, if it happens at all (which is also highly doubtful). The arguments for a price decrease are too fragile, and the risks of the greenback weakening are too high in light of Friday's Nonfarm Payrolls.
As mentioned earlier, the strengthening of the safe-haven dollar is due to investors fleeing to the "quiet harbor" and the rise in the yield of U.S. Treasury bonds. The dynamics of trading on the stock markets also testify to this. In particular, Wall Street closed in the red yesterday—the shares of heavyweights like Apple, Amazon, and Microsoft fell by more than 1% under the pressure of rising Treasury yields. The Dow Jones Industrial Average index fell by 95 points (0.3%) on Monday, the S&P 500 by 30 points (-0.6%), and the NASDAQ Composite decreased by 135 points (or 0.9%).
However, already today, Treasury yields have started to decline. In particular, the yield on 10-year government bonds has decreased to 4.23% (yesterday, the indicator was close to 4.30%).
According to some analysts, traders will soon switch back to "classic" fundamental factors, while the Middle East will again take a back seat. This is a bad scenario for dollar bulls, especially if the November Nonfarm Payrolls again end up in the red.
Recall that the dollar began to gradually lose its positions even before the release of resonant data on inflation growth in the U.S. in October, which happened slightly earlier when October data on the American labor market were published.
So, the unemployment rate in the United States unexpectedly increased to 3.9% in October. Throughout the previous two months, this indicator had stayed at 3.8%. Although the increase is minimal, the October result is the worst since January 2022. According to the forecasts of most experts, unemployment will remain at the same level in November, but some analysts believe the rate may rise to 4.0%.
The number of employed in the non-agricultural sector rose by only 150,000 in October (also a record low, the weakest result since December 2020). Moreover, the significant growth in September (336,000) was revised downward to 297,000. As for the November outlook, a rather weak result is also expected (185,000), again falling short of the key 200,000 benchmark. Wages were disappointing in October as well: the average hourly earnings growth rate fell to 4.1% YoY (the lowest value since August 2021). A further decline to 4.0% is expected in November.
As we can see, the main macroeconomic report of the week does not bode well for the dollar. If the November Nonfarm Payrolls, at least, meet the forecasts (not to mention the "red zone"), it will serve as a kind of stress test for the narrative of the Fed rate cut in the first half of 2024. It's essential to recall that, according to the CME FedWatch Tool, the probability of keeping the rate at the current level in May is only 12%. At the same time, the probability of a 25-basis-point reduction after the May meeting is 43%, and a 50-basis-point reduction is 39%. The market does not rule out even a 75-basis-point reduction, although the chances are only 5% (still nonzero, which is important).
Thus, despite the overall strengthening of the American currency, it is not possible to speak of a trend reversal in the EUR/USD pair. There are no substantial grounds for a sustainable (this is the key word) price decrease. On the contrary, the risks of the greenback weakening are high. Once geopolitics takes a back seat, dollar bulls will lose ground, and further price declines will be in question. Moreover, Nonfarm Payrolls may bring back the discussion of a Fed rate cut in the next six months.
Therefore, despite the tempting short positions, it is better to refrain from selling EUR/USD—downward impulses look unreliable and, most importantly, unjustified. In the short term, it is advisable to stay out of the market.