Weird U.S. Labor Market Still Favors Fed Tapering

The U.S. dollar weakened in an initial response to the non-farm payrolls miss last Friday. While a strong U.S. job report was previously expected, the job growth in September turned out to be the slowest this year. With only 194,000 jobs added last month, it was the unemployment rate that fell to 4.8 percent and rising wage growth that prevented the greenback from a steeper decline. The lower unemployment rate, however, can be attributed to the decline in the size of the overall labor force. Average hourly earnings showed the strongest advance since April, highlighting companies’ attempt to attract workers be offering higher wages.

Despite the weird labor market picture that simultaneously shows signs of weakness and overheating, the Federal Reserve is expected to proceed with a tapering of bond purchases.

The British pound stabilized above 1.36 as the likelihood of a December rate hike by the Bank of England increases. Latest remarks from BoE officials suggest that the market should brace for a “significantly earlier” rate increase than previously thought to curb inflation.

GBP/USD: If the cable climbs above 1.3660 we pencil in higher price targets at 1.3750 and 1.38. On the downside, we would wait for a renewed fall below 1.3540 in order to expect a test of 1.34.

EUR/USD: Chances could shift in favor of the bulls, provided that the 1.16-hurdle can be taken out. A sustained break above 1.16 would shift our focus to a higher target at 1.1670, followed by 1.1750. However, if 1.16 remains a resistance, we see a lower support zone between 1.1430-1.14.

This week, most attention will be paid to the September U.S. CPI print on Wednesday. Elevated price pressures may underline that Fed tapering is just around the corner.

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