05.07.201909:15 Forex Analysis & Reviews: Optimistic forecasts for the US labor market support the dollar, euro and pound under pressure

After a weak ISM index, indicating a continued slowdown in the US economy, the focus of the market today is on an employment report. This will shape the expectations for changes in the monetary policy of the Fed at the next meeting on July 31 and it will determine the prospects for the dollar. The forecasts are generally positive with an increase of 160 thousand jobs is expected, as well as a slight increase in the average wage from 3.1% to 3.2%. The release of data is not worse than expected to support the dollar, because it will reduce the chances of reducing the rate by more than 0.5% in the current year, which the market already takes into account in quotes.

The focus of the market is on an employment report after a weak ISM index, indicating a continued slowdown in the US economy. This will shape the expectations for changes in the monetary policy of the Fed at the next meeting on July 31 and will determine the prospects for the dollar.

At the same time, the updated forecast of the Congress Budget Committee (NWO) on the main parameters of the US economy does not give any reasons for optimism. The forecast includes all recent changes in legislation, including tax reform, low-interest rates and changes in the tariff policy. However, NWO does not see any chance to reduce the growth rate of public debt or the budget deficit. The national debt will grow from 78% in 2019 to 144% by 2049. Alternative scenarios will give a small variation but do not give a different outcome. The debt will grow rapidly in any scenario. Similarly, the budget deficit will continue to grow to 8.7% by 2049, mainly due to the servicing of public debt.

Therefore, it is essential that it is not about whether the United States will return to the growth path but which scenario will be implemented to land (hard or soft) and these expectations will determine the current positioning of major world currencies. At the moment, the probability that the Fed will reduce the rate immediately on July 31 by 0.5%, which according to the CME futures market is at 30.7% that is quite unexpected. However, the markets are preparing for a tough scenario. The 10-year Treasury yields were fixed below 2% and these levels were last seen at the beginning of November 2016.

On Friday, the dollar is likely to be supported and strengthened across the entire spectrum of the market. These are the expectations of a number of large banks, such as Danske, Nordea, and Mizuho.

EUR/USD pair

A decline in retail sales by 0.3% in May convince markets that the ECB will not be able to reach target inflation of 2% in the foreseeable future. The collapse of inflationary expectations increases the likelihood that the ECB will present an extensive package of new measures to stimulate the Eurozone economy at a meeting in September, including a reduction in Deposit rates, the restart of the TLTRO program and a number of other measures at the meeting in September. It is likely that these measures will outweigh the effect of the Fed rate cut as the Fed does not plan any other measures, and the dollar will gain a certain advantage against the euro under these conditions.

The euro continues to be under pressure after Mario Draghi announced on June 18 the expansion of incentive measures. In fact, Draghi did not focus on the growth of eurozone GDP or inflation. The key moment of his speech looks different as the trade-weighted euro rate has risen, while the stock prices have become lower.

Thus, the main goal of the ECB manifested is not to stimulate the economy to increase inflation, but to ensure that TWI is at levels consistent with economic activity. In other words, the euro should not be allowed to grow until economic growth is insufficient.

This is a key point for assessing the prospects for the euro at the current stage and therefore, the downward movement of the EUR/USD pair is not so much because of the difference between the monetary policies of the Fed and the ECB as the TWI align in accordance with business activity.

The EUR/USD pair is not able to get together with the forces to break through the support of 1.1275, as we expected this may happen today. Further fixing below the support of 1.1240 / 50 will increase the chances of a downward trend reversal.

GBP/USD pair

Trading of the pound is ranging sideways. It holds to the support of 1.2500 but the withdrawal below may occur today. There is no economic news that could bring the pound out of range on Friday morning. Hence, the pound will largely respond to statistics from the United States and the main target of the bears remains to the minimum of 2019.