The greenback was knocked down by the weak US nonfarm payrolls for April. Indeed, the employment in April greatly undershot the forecast. Meanwhile, EUR/USD is testing multi-week highs. US nonfarm payrolls logged robust employment growth for two months straight, in February and March. However, the April score discouraged dollar bulls. Importantly, the greenback revealed weakness yesterday that enabled EUR/USD buyers to overcome resistance of 1.2070 (Tenkan-sen in the daily chart).
The US currency was weighed down by the dovish rhetoric of the US Fed. The policymakers assured market participants that the central bank would not scale back the bond-buying program and above all else raise the federal funds rate. Over the two last days, several Fed's officials echoed the rhetoric of the Fed's leader. Among them were Raphael Bostic, Loretta Mester, Erick Rosengren, Robert Kaplan, Charles Evans, and Thomas Barkin. All of them rejected the hawkish words by Treasury Secretary Janet Yellen who triggered rumors about earlier-than-expected monetary policy tightening.
This week, she admitted in an interview that tighter monetary policy might be needed to avoid overheating of the US economy. As the Federal Reserve had reiterated the opposite for a few months before, the market was vulnerable to Yellen's words that triggered higher volatility. As a result, the US dollar strengthened across the board and yields of US Treasuries were soaring again, hitting fresh highs. However, the next day the Treasury Secretary cleared up her point, saying that a rate hike would be the question of the long-term prospects. Such verbal interventions bruised the US dollar. Its index again reversed downwards. Today the NFPs dealt a final blow to the US currency, thus wrecking hopes of dollar bulls.
According to the consensus, the US unemployment rate was expected to decline to 5.8% to the pre-crisis level. In practice, the jobless rate logged an uptick to 6.1%. Besides, market participants were discouraged by soft employment growth. The US economy added just 266K new jobs, much weaker than the expected 990K new jobs. Breaking down the economic sectors, the private sector was projected to create 893K jobs, but the indicator actually grew by 218K in April. In the manufacturing sector, employment contracted for the first time since January. Economists expected 55K new jobs but the manufacturing sector actually lost 18K jobs. Some Fed officials have already commented on the dismal nonfarm payrolls. Federal Reserve Bank of Minneapolis President Neel Kashkari stated that the April employment data proved that prospects of monetary policy should be reckoned through actual economic metrics but not through forecasts.
From my viewpoint, a lot of his counterparts will echo this important message. Indeed, the outlook on the US economy (including the one by the Federal Reserve) looks too rosy. The labor market could be also overestimated. On the one hand, such expectations enable a conclusion that the regulator might consider monetary tightening earlier than it was previously stated. On the other hand, Fed's officials reiterate like the mantra that traders are wrong to make such conclusions. Jerome Powell and his colleagues think that the economic boom in the US could be temporary. The Fed's leader voices concerns that bullish momentum is likely to fade at the year end. Besides, the US economy will hardly be able to sustain momentum in the coming two years.
At the press conference following the policy meeting in April, the Fed's Chairman assured journalists that the regulator would keep on the pace of bond buying until the notable progress in achieved. Later on, the policymaker said a few times that it was too early to taper monetary stimulus as inflation acceleration has a temporary character and does not correspond to the criteria applied by the US Fed when deciding on monetary policy tightening. At the same time, Jerome Powell insisted that the US economy has to go a long way until the two major goals are met: inflation reaches the target level and the labor market achieves full employment. The nonfarm payrolls released today are an eloquent proof of the Fed's dovish stance.
Today the US dollar lost an important ally that ensured solid support for a few months in a row. I guess that the April nonfarm payrolls ruined the hawkish hopes of investors, at last in the medium term.
Amid the current background, EUR/USD is set to trade upwards. From the technical point, the currency pair is now testing resistance of 1.2160 which is the upper border of Bollinger bands in the daily chart. Besides, the price is located above all lines of Ishimoku indicator, including Kumo cloud. Importantly, Ishimoku indicator has formed the bullish signal. All these factors suggest that it would be a good idea to consider long positions on EUR/USD with the main target of 1.2243 which is the highest level this year.
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