FX.co ★ EUR/USD. "Takeoff, landing, takeoff": weak ADP report scared dollar bulls

Dollar bulls panicked: today's report on the US labor market from the ADP agency turned out to be a complete failure – the result was twice as low as forecasts. Such an unexpected "cold shower" on the eve of the publication of July Non-farms put pressure on the greenback, after which EUR/USD bulls again tried to overcome the resistance level of 1.1890.

Looking ahead, it should be emphasized right away that today's corrective growth of the pair was due solely to the temporary weakness of the dollar, and not to the strengthening of the euro. These are rather worrying times for the US currency, when every macro report is viewed through the prism of the prospects of the stimulus program. The fate of QE may be decided already at the September meeting of the Federal Reserve: despite the dovish position of Fed Chairman Jerome Powell, many representatives of the Fed "directly" lobby for the idea of normalizing monetary policy. Just today, the president of the Federal Reserve Bank of St. Louis, James Bullard, said that the central bank needs to start curtailing the stimulus program "as soon as possible". In his opinion, both the markets and the US economy are ready for this step. Bullard also noted the consistent growth of the labor market and the record growth of inflation indicators.

The hawkish position was also voiced today by Fed Vice President Richard Clarida. And although his rhetoric was more restrained, he also admitted that the issue of curtailing QE is on the agenda. He said that at the next meetings, the Fed will assess the progress in moving towards the target levels (primarily in the labor market and inflation), after which it can notify the markets about the upcoming beginning of the curtailment of the stimulus program. As for the fate of the interest rate, in his opinion, all the necessary conditions for starting a rate increase will be met by the end of next year. Therefore, the first step towards tightening the parameters of monetary policy should be expected either at the December meeting of 2022, or at one of the first meetings of 2023. Summarizing his speech, Clarida stressed that the central bank's decisions on monetary policy (both regarding QE and the rate) do not depend on forecasts, but "primarily on incoming data".

This position increases the role of macroeconomic reports, which, as luck would have it, do not please dollar bulls this week. Following the release of a rather weak ISM manufacturing index, a weak report from the analytical agency ADP was published today, after which the dollar index again plunged into the area of the 91st figure.

So, according to the specialists of the Automatic Data Processing agency, only 330,000 jobs were created in the US private sector in July, with a forecast of growth of up to 695,000. Such a weak result came as a surprise to market participants, so the dollar reacted to the release with a sharp decline against a basket of major currencies. It is also worth mentioning the ISM manufacturing index, which was published on Monday. The indicator fell to the level of 59.5 points, contrary to the forecasts of analysts, who expected its growth to 61 points in July.

Against the background of such news, the euro-dollar pair jumped to the borders of the 19th figure, where it met quite strong resistance from the bears. Traders once again failed to overcome the 1.1900 mark, after which the pair turned sharply and rushed down to the lower limit of the 1.1840-1.1890 range.

In my opinion, this happened for several reasons.

Firstly, ADP reports do not always correlate with Non-Farms, thereby rendering a disservice to traders - overestimated or, conversely, underestimated expectations provoke increased volatility, especially when official figures do not repeat the trajectory of ADP.

Secondly, the US index of business activity in the services sector from ISM came out much better than forecasts. According to preliminary forecasts, this indicator should have demonstrated a slight increase (from the level of 60.1 points to 60.5 points). However, in reality, it jumped to the level of 64.1 points (a multi-month record).

Third, dollar bulls, apparently, are impressed by the rhetoric of the Fed representatives who spoke today during the US session. And if Bullard consistently defends the hawkish position, then Clarida surprised the markets with his comments. There have been rumors on the market for quite a long time that the Fed's interest rate may be raised not in the second half of 2023 (according to the median forecast), but at the end of next year. By and large, the vice president of the Fed "legalized" such rumors, allowing the possibility of such a scenario.

Thus, before the release of US Non-farms, for the EUR/USD pair, you can stick to the previous strategy, opening short positions when approaching the 1.1900 mark. The target of the downward pullback is the mark of 1.1840 (the Kijun-sen line on D1). The main support level is the average line of the Bollinger Bands on the same timeframe, which corresponds to the level of 1.1810. Given the importance of Friday's release, the pair is likely to be traded in the "take-off-landing" mode, within the above-mentioned price band.