U.S. Nonfarm payrolls disappointed last Friday with only 235,000 jobs created in August.
The U.S. dollar sold off in an imminent response to the report but the greenback’s decline was limited after several days of weakness while bigger currency movements remained absent.
Despite the weaker than forecast job growth, average hourly earnings rose 0.6 percent last month, bolstering the dollar as hawkish Federal Reserve officials might sound the alarm. Speaking of a taper, traders now shift their focus to the November 2-3 FOMC meeting after policy makers have one more report from September in hand.
The euro’s recent climb cannot be solely attributed to the dollar’s weakness, but also to speculation that the European Central bank is considering its own taper timeline.
According to economists surveyed by Bloomberg, the European Central Bank will start slowing down its pandemic bond purchases in the fourth quarter and may not exhaust the whole 1.85 trillion-euro program before it ends next year.
On Thursday, ECB policy makers will have to decide when to shift the institution away from its crisis mode. The inflation outlook now warrants stepping back stimulus, with inflation jumping to 3 percent, well above the ECB’s goal. The hawks have been very silent during the crisis phase but now as ‘normality’ is coming back, they could try to convince the doves to slow down the pace of asset purchases. More cautious policy makers will try to keep the focus on the uneven nature of the economic recovery and the risks from the delta strain.
The greatest danger comes however from a missing agreement between ECB policy makers and the risk that by December or January they still haven’t come to an agreement.
Technically, the euro touched its range resistance around 1.19 and traders wonder whether this could be the limit. Ahead of Thursday’s ECB decision we expect some corrective movements towards at least 1.1830 and eventually 1.1750. A break above 1.1910 however, could spur bullish action towards 1.1950 and 1.1980.
The cable reversed shy of 1.39 whilst entering overbought territory. As long as the pair remains below 1.3930, we favor consolidative movements between 1.39 and 1.37.
U.S. markets are closed for the Labor Day holiday today but volatility is expected to pick up materially after the holiday.
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