At the start of Friday's U.S. trading session, key labor market data for the United States was released. Almost all components of the release were in the green zone, leading to a strengthening of the greenback across the market. The U.S. Dollar Index jumped to 104.26, hitting a three-week high. In turn, the EUR/USD pair declined to the support level of 1.0720 (the lower line of the Bollinger Bands on the daily chart). However, the pair impulsively failed to surpass this target, subsequently retracing to the mid-7th figure. It is worth noting that not all components of today's report favored the dollar. For instance, the pro-inflation indicator (average hourly earnings) hit a multi-month minimum today. Therefore, it would not be entirely accurate to speak of a definitive victory for the dollar bulls in the current situation. The fate of the greenback will depend on the U.S. Federal Reserve, whose members will assess today's release next week.
It is evident that many market participants have reached similar conclusions, as indicated by the "price jerks" in the EUR/USD pair. Overall, bearish sentiments prevail in the pair, but whenever the pair approaches the boundaries of the 6th figure, it bounces back. It can be assumed that if sellers do not solidify below the 1.0720 target by the end of today, buyers may take the initiative in the pair next week.
In the current environment, it's crucial to bear in mind the so-called "quiet period," during which Federal Reserve representatives refrain from commenting on ongoing developments in the public domain. Consequently, traders are compelled to independently assess the unfolding situation. Market participants will need to scrutinize November's Non-Farm Payrolls without the customary insights from official channels, considering the potential implications for the trajectory of monetary policy tightening or easing. The situation is nuanced, given the conflicting signals in the broader economic landscape.
In an unexpected turn, unemployment for November declined to 3.7%, defying the consensus expectation of remaining at the October level of 3.9%. Non-agricultural sector employment increased by 199 thousand, surpassing the forecasted growth of 184 thousand. While the indicator entered positive territory, it marginally fell short of the 200-thousand mark for the second consecutive month. Private sector employment saw an uptick of 150 thousand against a forecast of 158 thousand. The working-age population's share inched up to 62.8%, a slight increase from the previous month's 62.7%.
However, wages aligned with expectations. This presents a notable and sensitive aspect in November's Non-Farm Payrolls concerning the greenback. The average hourly earnings indicator dipped to 4.0% on an annual basis, marking the lowest figure since August 2021. Furthermore, the previous month's result (October) underwent a downward revision to 4.0%, contrary to the initial estimate indicating a decrease to 4.1%.
Hence, sellers were unable to execute a "southern blitzkrieg" and impulsively conquer the 6th figure. De facto, all inflation indicators (consumer price index, producer price index, import price index, core PCE index, wages) showcased a downward trend last month, reflecting a slowdown in inflation. The remaining components of today's release indicate that the U.S. labor market is in good shape, but not overheated.
In my view, such a scenario does not negate the hypothetical possibility of an interest rate cut by the Federal Reserve in the near term. According to the CME FedWatch Tool, the November Non-Farm Payrolls had no significant impact on the market: traders still assess the likelihood of a rate hike in January-February at 0%, and the probability of a rate cut in spring 2024 (May meeting) stands at 50/50. Furthermore, traders do not rule out the possibility of a 50-basis-point rate cut, with a 31% probability of this scenario materializing in May.
Therefore, the caution of EUR/USD sellers is understandable and, in my opinion, entirely justified. The initial downward impulse also appeared logical, considering the dismal labor market reports published in the U.S. yesterday and the day before (ADP, JOLT, Unemployment Claims). Traders were "mentally prepared" for weak Non-Farm Payrolls, and in this case, the market's subdued expectations played in favor of the U.S. currency.
However, given the overall fundamental picture, rushing into sales may not be prudent, at least until EUR/USD sellers settle below the support level of 1.0720. The U.S. labor market provided support to the dollar bulls, but today's report is unlikely to settle the debate on the advisability of monetary policy easing in the near term.