31.08.202304:03 Forex Analysis & Reviews: EUR/USD. Alarm bells for the dollar

For dollar bulls, a tough stretch has arrived. The latest macroeconomic reports exerted downward pressure on the greenback, allowing EUR/USD buyers to return to the 9th figure. Even though the most crucial releases of the week will be published a bit later (on Thursday and Friday), Wednesday's "harbingers" have made dollar bulls anxious. The bearish prospects suddenly became questionable: the fundamental backdrop is gradually changing, and it's not moving in favor of the EUR/USD sellers.

Let me remind you that on August 31st, the euro area inflation report will be released, and on Friday, September 1st, Nonfarm payrolls will be announced in the US. In turn, we saw reports that "precede" the main releases. I am referring to the report from the ADP agency and the inflation data in Germany.

One can argue that the ADP figures do not always correlate with the official ones – therefore, one might say, it's too early to jump to conclusions right now. Indeed, the optimism/pessimism of the agency hasn't always been confirmed by Nonfarms: for instance, a month ago, the preliminary report deceived traders with its "green tint" (the result exceeded forecasts twofold), but the official employment indicators came out in the "red", significantly falling short of forecasted values.

Nevertheless, Wednesday's ADP report exerted strong pressure on the greenback, especially since the other data (which we'll discuss below) also disappointed dollar bulls.

Job creation in the United States slowed more than expected in August, according to ADP, with private employers only adding 177,000 jobs (the weakest result since April), compared to forecasts of almost 200,000. Such a result suggests that the corresponding component of the Nonfarm payrolls may also fall into the "red". Take note that the preliminary forecast is already quite weak: according to most experts, the official figure will only increase by 169,000 (the lowest value since April 2023). Given the latest "preview", the actual result may be weaker than stated. These grim prospects mount pressure on the greenback.

However, the ADP report isn't the only thing that is concerning. The second estimate of US GDP for the second quarter was also published on Wednesday. Contrary to the optimistic forecasts of most analysts, the figure was revised downwards. According to the initial estimate, the American economy grew by 2.4% (with a forecast of 1.8%). However, gross domestic product increased at a 2.1% annualized rate last quarter, the government said in its second estimate of GDP for the April-June period (in the first quarter, the growth rate was 2.0%). The Personal Consumption Expenditures (PCE) index, according to the second estimate, increased in the second quarter by 2.5% (revised downward by 0.1%), excluding food and energy prices the index rose by 3.7% (this component was also revised downward by 0.1 percentage points).

According to comments from the Bureau of Economic Analysis, the updated estimates primarily reflect downward revisions to private inventory investment and nonresidential fixed investment, "that were partly offset by an upward revision to state and local government spending".

After the reports, the likelihood of a rate hike at the September meeting dropped to 9%, according to the CME FedWatch Tool. The probability of a quarter point rate hike at the November meeting also decreased – to 38% (on Tuesday, the odds were estimated at 50%). Amid diminishing hawkish sentiment, the dollar came under significant pressure.

For the euro, the situation is quite the opposite. Inflation in Germany remains stubborn although the GDP report reflected a decline in all components. This report also has a "preceding" nature – typically, German figures are published just a day or two before the pan-European ones, and thus they serve as a kind of indicator. The Consumer Price Index came in at 6.1% y/y, compared to a forecasted decline to 5.9%. The Harmonized Index of Consumer Prices (HICP), which the European Central Bank prefers to use to measure inflation, increased by 6.4%, against a decline to 6.2%.

According to preliminary forecasts, the euro area CPI will drop to 5.1% in August (the lowest value of the indicator since February 2022). The core index, excluding volatile energy and food prices, is also expected to show a downtrend, falling to 5.3%. However, if these figures end up in the "green", the issue of an ECB rate hike at the September meeting will again come to the fore (at present, the chances of this scenario is estimated at 35-40%).

Thus, the latest data sounded some alarming bells for the USD: the weak ADP report and the revised data on the growth of the American economy do not contribute to the dollar's appeal. While the euro received unexpected (albeit mixed) support from the German report.

The emerging news background allowed EUR/USD buyers to build a significant correction around the 9th figure. However, it's worth remembering that ADP figures don't always correlate with Nonfarms, and the revised US GDP data still showed growth in the American economy. And if the core PCE index ends up in the "green" on Thursday, the dollar will emerge once again, and EUR/USD sellers will return to the area of the 8th figure. Therefore, you should only consider long positions once traders have consolidated above the resistance level of 1.0950 (the lower band of the Kumo cloud on the daily chart). The current price growth is impulsive and rather emotional in nature: it's too early to speak of a trend reversal.