04.01.202210:38 Forex Analysis & Reviews: EUR/USD. Fed's minutes and Nonfarm data are in focus

Buyers of the EUR/USD pair tried to leave the price range of 1.1260-1.1360 on the last day of 2021, so the price surged to the level of 1.1387. The last trading day of the week, month, and year was on the bullish side, as many traders took profits without risking leaving open positions over the weekend. As a result, the pair updated its one-and-a-half-month price high.

However, the first trading day in 2022 put everything in its place. The pair collapsed by more than 100 points in just a few hours on Monday: the high of the day was consolidated at 1.1384, then the daily low was at 1.1280. In fact, have market participants returned to their original positions. The pair has been moving around the level of 1.1300 since the end of November 2021, moving away from this target by 30-60 points, then fluctuating up and down. Now, traders are waiting for a strong information driver that will be able to push the price out of this range.

There are two releases this week – the first release is the minutes of the Fed's last meeting, and the second one is the Nonfarm data. It should be noted that yesterday's downward trend of the EUR/USD pair was mainly due to the strengthening of the US currency. The US dollar index sharply rose following the Treasury yield. In particular, the yield on 10-year securities rose from 1.512% to 1.637% within a few hours, that is, to a multi-week high. The last time the indicator was at this level was on November 24. This factor provided key support to the US dollar amid an almost empty economic calendar. We believe that Treasury yields are growing due to the strengthening of hawkish expectations regarding the Fed's further actions. USD bulls have big plans for the current year: the stimulus program will end in the spring, after which the Fed will begin tightening the parameters of monetary policy. However, it is still unknown how aggressive the pace of tightening will be. Major releases of the coming days will tip the scales in one direction or another.

In this case, the Fed's minutes will allow us to assess the general mood of the members of the US regulator, in the context of the latest statements by Jerome Powell. The rhetoric of the Fed chairman at the end of the last meeting was too cautious and hesitant. First, he said that the November US labor market data was disappointing. It can be recalled that the number of people employed in the non-agricultural sector in November increased by only 210 thousand against the expected growth of 530 thousand. So, Powell says the working-age population is "disappointing." Second, he said that the Fed has not yet developed a common position on the length of the pause (or the need for it in principle) between the end of QE and the first increase in interest rates. On the other hand, the point forecast, which was updated at the December meeting, allows for a double (and even triple) increase this year. The minutes of this meeting will answer an important question: are the Fed members ready for an aggressive pace of rate hikes? The text of the minutes may take a "hawkish" attitude, or, on the contrary, the cautious attitude of the Fed officials. In general, this document that will be published on Wednesday may become a starting point in terms of strengthening the US currency.

Friday's release is also important. The latest US labor market data left more questions than answers. On the one hand, the number of employed in November increased by only 210 thousand, while the forecast for growth was 530 thousand. On the other hand, the US unemployment rate declined to 4.2%, while the share of the economically active population increased to 61.8%. Meanwhile, salaries came out "at the level". In particular, the level of the average hourly wages rose by 4.8% in annual terms.

According to preliminary forecasts, December labor market data will support the US currency. In particular, the unemployment rate should fall to 4.1%. The average hourly wage should increase by 0.5% on a monthly basis and by 4.6% on an annual basis. If the salary figures come out in the "green zone", investors' inflation expectations will increase again. The growth of the oil market, problems in supply chains, and the growth of average wages are factors that will also help the inflationary spiral to persist. The capital indicator, reflecting the increase in the number of people employed in the non-agricultural sector, should also reach a "decent" level, reflecting the creation of 410 thousand jobs. Indicators should similarly demonstrate positive dynamics in manufacturing and in the private sector.

Therefore, EUR/USD bears may take the lead this week, leaving the multi-week range of 1.1260-1.1360. If the Fed's minutes do not disappoint USD bulls, and Nonfarm data come out at least at the forecasted levels, the US dollar will continue to gain momentum. Technically, the pair on the D1 timeframe is traded between the middle and lower lines of the Bollinger Bands indicator, as well as under all the lines of the Ichimoku indicator. Any more or less massive upward surge can be used as an excuse to open short positions. The first target is the lower line of the Bollinger Bands, which corresponds to the level of 1.1240. The main target is 1.1186, which is a one-and-a-half-year price low reached last November.