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Forex Analysis:::2020-08-07

EUR/USD. "Green" Nonfarms and bad news from Capitol Hill

The US dollar ends the current trading week on a major note: despite the ongoing political battles in the US Congress, the greenback strengthened across the market, thanks to strong macroeconomic reports.


The EUR/USD pair collapsed by more than 100 points. Other currency pairs of the so-called "major group" showed similar dynamics, reflecting the demand for the dollar. However, it is too early to talk about a trend reversal – even in the medium term. The American won today's round, but the complete victory is still far away – at least, to break the situation, you need good news from Capitol Hill (which is not). Therefore, at the moment, we can only talk about a correction. A large-scale, fairly comprehensive, but still correction. The next trading week will put everything in its place – but in the meantime, dollar bulls can "uncork the champagne": Non-Farms have become a kind of lifeline for the US currency.

What happened?

Key data on the labor market for July were published today. Non-Pharmaceuticals themselves play an important role for traders, but this release had a special significance for the market. First, in July, an outbreak of coronavirus was recorded in the United States. The daily increase in the number of cases did not fall below the 60-thousand mark, and on some days it remained above the 70-thousand target. The epicenter of the epidemic shifted to the south of the country – in California, Florida, and Texas, record rates of morbidity and mortality were recorded (and are still being recorded). Although the quarantine restrictions were not tightened at the national level, local authorities took appropriate decisions (for example, in Miami). This circumstance could negatively affect the dynamics of the recovery of the American labor market.

Secondly, on the eve of the release of July Nonfarms, the market received quite ambiguous signals. For example, the increase in the number of initial applications for unemployment benefits in mid-July paused its decline (which lasted for 12 weeks) and began to show a slight pullback, reflecting worrying trends in the labor market. Also, just two days before today's release, an extremely weak report was published from the ADP agency, whose experts also monitor the situation in the US labor market. According to their data, in July, the increase in the number of people employed in the private sector was only 167 (experts predicted to see an increase of up to 1.5 million).

In other words, the intrigue around the July Nonfarms persisted until the last minute, so the reaction to today's release was very volatile. The pendulum could swing one way or the other. As a result, Nonfarm were on the side of the dollar: almost all components of the release came out in the "green zone", exceeding the forecasts of experts. Thus, the unemployment rate fell to 10.2% (the forecast was at 10.5%), and the number of people employed in the non-agricultural sector increased by 1 million 763 thousand (with forecast growth of 1.5 million). Only the manufacturing sector of the economy "pumped up" – the increase in the number of people employed in this area was only 26 thousand, although analysts expected to see this figure much higher, at the level of 250 thousand. But salaries – pleased. The average hourly wage rose by 0.2% every month (the indicator came out of the negative territory for the first time since May), and rose to 4.8% on an annual basis (with a growth forecast of 4.2%). The growth of this indicator has a positive impact on the level of consumer activity of Americans, and therefore on inflationary processes.



Thus, the dollar is reasonably growing today, demonstrating a corrective recovery. The published data reduced market concerns about the prospects for recovery of the US economy in the second half of the year. But for a more confident growth, dollar bulls lack the last puzzle, "worth" one trillion dollars. We are talking about the Republican party's bill on additional assistance to the US economy. Republicans still cannot agree with the Democrats, although both sides assure reporters that "some progress has been made". But the de facto situation is hanging in the air: congressmen from different political camps do not want to make serious concessions in the run-up to the presidential election. Moreover, as White House economic adviser Larry Kudlow said today, negotiations on the stimulus package "have reached an impasse to date". This fact did not allow the dollar bulls to fully manifest themselves: the growth of the dollar index and the decline of the euro/dollar pair was limited.

How to trade?

At the moment, the first reaction to the publication of Nonfarm has already subsided. The dollar index began to gradually slide down again, and the eur/usd pair floated in the 17th figure. This is largely because traders began to fix profits en masse, without risking leaving open positions for the weekend. Especially since the negotiations between Republicans and Democrats will take place on Saturday and Sunday. If they announce a compromise by Monday, the dollar will continue its ascent. Otherwise, the greenback will return to the same positions as it was before Nonfarming. In the context of the eur / usd pair, this means that the pair will return to the area of the 18th figure and again try to test the 19th price level. Thus, it is too late to open trading positions now – traders have already "played" the macroeconomic release. On the weekend, it is necessary to monitor American news feeds: if the congressmen still find a common denominator, the downward movement of EUR/USD will resume with a new force. The main support level (the goal of the southern movement) is located at 1.1650 – this is the lower line of the Bollinger Bands indicator on the daily chart.

Irina Manzenko
Analyst InstaForex
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