Relevance up to 03:00 2022-10-11 UTC–4
By the end of this week, the US currency is striving to gain stability and settle on the conquered peaks. However, sometimes luck turns away from the dollar, although the latter still remains the darling of fate. It is much more difficult for the euro, which is easier to exist in a relatively stable price space. The single currency has to fight the attraction of a negative trend in order not to go into a downward spiral.
The recent rise of the greenback was facilitated by positive macro data from the United States and market expectations for a further rise in the Federal Reserve rate. On Wednesday, October 5, the ADP National Employment report showed that employment in the US private sector increased in September. As a result, the US labor market was replenished with 208,000 new jobs. This indicator exceeded the forecasts of economists, who expected an increase of 200,000. This gave an additional boost to the USD, which took advantage of the situation and soared sharply ahead of the euro. On Thursday morning, October 6, the EUR/USD pair was trading at 0.9903, while experts recorded a noticeable decline in the dollar.
This week, the euro has made two unsuccessful attempts to restore parity with the greenback. According to analysts, for this, there must be a craving for risk in the markets, which is now almost at zero. Negative macro data on the eurozone add fuel to the fire. The composite index of business activity in the region fell to 48.1 points in September. Recall that in August this indicator was 48.9 points. A value below 50 points indicates a noticeable contraction of the European economy after the peak of growth recorded in April 2022. Such a slowdown in business activity prevents the European Central Bank from fighting inflation as quickly and effectively as possible. According to analysts, the euro needs to strengthen risk appetite for further recovery. However, risk-free sentiment is now dominating the markets. Investors avoid sudden movements and still prefer to invest in USD.
Against this background, the US currency seeks to hold the conquered borders and prevent a rollback. In many ways, this is facilitated by moderately positive statistical data from the United States. According to current reports, business activity in the services sector increased slightly in September compared to August, and the PMI index for the ISM services sector fell to 56.7 from the previous 56.9. The current indicator turned out to be higher than the expected value of 56, the appearance of which experts feared. Based on these data, Wells Fargo analysts believe that the current report indicates the expansion of this sector. Experts note that, despite the reduction of the main components of the index, the employment rate remains one of the highest. According to the document, the employment component increased by 2.8 points, reaching 53 points, and became the highest in the last six months. Wells Fargo expects continued economic growth in the United States along with a moderate decline in business activity.
Investors’ confidence in the continuation of the Fed’s aggressive monetary policy aimed at further raising rates contributed to the current dollar recovery. Most market participants are confident that the central bank will follow the chosen course and will raise the key rate again in late 2022-early 2023. Investors are trying to calculate the trajectory of the Fed’s interest rate growth, but it is difficult to accurately determine it.
The hope for a further increase in interest rates was given by the statements of Mary Daly, president of the Federal Reserve Bank of San Francisco. According to Daly, the authorities need to focus on the fight against inflation, the main tool in the fight against which is an increase in rates. Philip Jefferson, a representative of the Fed, agrees with this, who confirmed that slowing inflation is a key goal for politicians, but it is necessary to carefully choose ways to combat it so as not to damage the economy.
In such a situation, the greenback wins, confidently pushing the euro out of the leading positions. The US currency is not afraid of short-term subsidence, and current macro data give it additional “recharge”. The focus of investors’ attention is the upcoming macro statistics on the labor market in the United States, which is expected on Thursday and Friday, October 7. In the near future, there will be data on the number of initial applications for unemployment benefits (per week). According to preliminary forecasts, this indicator increased by 10,000, reaching 203,000. According to experts, unemployment in the United States remained at 3.7% in September, and the number of people employed in the non-agricultural sector of the economy increased by 250,000.
Recall that unemployment data in the United States is very important for the Fed, since the central bank focuses on them when making a decision on the rate. Earlier, the department has repeatedly stated its readiness to fight galloping inflation by raising the key rate. It should be noted that this year the rate has been raised five times. In November 2022, the markets expect another increase in it. At the same time, 66% of experts predict an increase in the rate by 75 bps, to 3.75-4%, and the remaining 34% expect an increase by 50 bps.
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