FX.co ★ The dollar sees no ceiling

We all would like wars to end as quickly as possible, but sometimes they last for years, sometimes decades. The Federal Reserve's war on inflation is no exception. Investors are looking forward to when the labor market finally starts to cool down. The increase in employment by 528,000 in July showed that the labor market is still hot as a stove. And if so, then inflation will remain hot for a very long time. The Fed will have to fight it by rolling up its sleeves, which means that there can be no question of any slowdown in monetary tightening. Bad news for EURUSD.

Is it possible to speak of a recession, when employment growth exceeds the average value of the indicator for the last six months, and unemployment falls to 3.5%, the lowest level since 1969? During the Great Recession of 2008-2009, it jumped to 10%, in 2020 due to the pandemic - up to 15%. Now the situation is completely opposite. Americans are in no hurry to return to the labor force, hiring is strong as a bull, which means that wages will grow by leaps and bounds, fueling already high inflation. Indeed, in July the average wage jumped by 0.5% m/m and 5.2% y/y, beating Bloomberg analysts' forecasts. The Fed and the financial markets need to be prepared for consumer prices to dig in around 9%, and kicking them out won't be easy.

American Employment Dynamics

A strong labor market report is likely to dissuade investors that the Fed will only be able to raise the federal funds rate to 3.5% and then begin to cut it. In fact, now even 4% does not look like a ceiling. The September FOMC meeting is likely to consider a 75 bps increase in borrowing costs, which should cool the S&P 500 bulls, boost Treasury yields and strengthen the US dollar. This is exactly the reaction we are seeing in response to the release of US employment data for July. Such asset dynamics will lead to tighter financial conditions. This is what the Fed is trying to achieve, but the central bank still has a lot of work to do. Especially given the fact that the figure has recently grown.

Dynamics of Financial Conditions and the S&P 500

Thus, the bears on EURUSD retained two of their key trump cards: the divergence in the monetary policy of the European Central Bank and the Fed, as well as high demand for safe-haven assets amid a difficult economic and geopolitical situation in the world. Expectations of strong statistics on US inflation can become a new catalyst for the peak of the main currency pair. Bloomberg analysts expect consumer prices to slow in July from 9.1% to 8.7% and core inflation to accelerate from 5.9% to 6.1%. The numbers will continue to be at elevated levels, hinting that the Fed is far from doing its job.

Technically, on the EURUSD daily chart, the fall of the pair's quotes below the fair value by 1.019 indicates the seriousness of the bears' intentions. The failure to return to this level is a reason for selling the euro against the US dollar in the direction of 1.007 and 1.