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The Federal Reserve has reignited investor demand for the US dollar. Accelerated QE tapering would allow the regulator to begin its first interest rate hike in mid-March. Despite such a hawkish signal, the US dollar stumbled. In the meantime, the ECB is effectively copying the Fed's policy.
Demand for the US dollar is boosted by discussions over the Fed's next move. No central bank, particularly those in countries with low-yielding currencies, can present a credible answer against the US regulator. In Europe, central banks are now already considering tightening their monetary policy. The German sovereign debt market is already trying to price in a hawkish tilt by the ECB. The yield of German 10-year bonds has risen to a 2.5 year high.
Germany's CPI data was particularly notable, given the growing interest of central banks worldwide to inflation. Latest data suggests inflationary pressure is rising in the Euro zone. In Germany, the CPI reached the highest level in 30 years, with prices growing in December by 5.3% compared to 5.2% in November. Economists predicted that prices would increase by 5.1%.
The risk-off environment on the market is giving short term support to EUR/USD. Investors shift away from foreign risk assets, pushing up the euro. The European currency is likely to come under pressure again when risk assets consolidate.
Long term growth of the euro would require strong support, but it is currently hard to find.
The demand for US dollar was temporarily disrupted by unfavorable macroeconomic data. US jobless claims suddenly increased to 207,000 last week, surpassing a previously forecast of 197,000. The trade deficit increased by 19.4% or $13 billion to 80.2 billion in November. The market expected the deficit not to exceed $77.1 billion.
If bearish pressure resumes, the dollar would encounter support at 95.88 and at the December low at 95.57.
The overall trend for the dollar has remained bullish so far - on Thursday, USD rallied, pushed up by an imminent interest rate hike in the US. Despite intermittent headwinds, particularly from the ECB, the US dollar could likely continue to rise in early 2022, MUFG Bank analysts say.
The growing amount of jobless claims ahead of non-farm payrolls is a cause for alarm, particularly amid the challenging COVID-19 situation. According to the US Labor Department, disruptions caused a sharp increase in COVID-19 cases could push unemployment claims even higher in the future.
Non-farm payrolls and the EU inflation data following them would seriously influence the US dollar's trajectory on Friday. This could lead to a period of high volatility for EUR/USD.
The earning increase data, which a key indicator of a possible labor market imbalance, could influence USD more than the amount of new jobs.
The support levels are located at 1.1270, 1.1240 and the psychological level of 1.1200. If the pair manages to settle above 1.1300, it would then encounter resistance at 1.1320, 1.1340 and 1.1360 - its highest level since ECB's data release.
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