Article provided by FXPro
At the end of the week we will see another portion of the important U.S. labor market statistics, which quite often determines the market trend for the upcoming weeks. May's report exceeded all expectations. The increased number of employed citizens - by more than 200 thousand people - allowed talking about the continuing growth of the American economy, and the acceleration of wage growth made the investors expect the accelerating inflation.
Last month's statistics removed much of the doubt that the Fed would reconsider its forecasts towards higher rate increase. In addition, many people were relived to see the fall of the unemployment rate to 3.8%. The number hasn't been this low since April 2000 when it went up again after a month. We haven't seen it stable at such a low level since the late 1960s.
In both cases, the values below 4% were preceded by longer periods of higher numbers. There were no high-profile problems in the economy, but the economic growth slowed down, and the Fed ignored the inflation rate, which was slightly higher than their target level instead concentrating on the economics' support.
Analysts expect the unemployment rate to stay at 3.8% level and the number of employed to grow by 200 thousands. These numbers will be a sign that the economy grows indeed with a pace slightly above its potential.
Besides, it is expected that further acceleration of hourly earnings rate will grow to 2.8% YoY. Such indicators will confirm the correct attitude of the Fed to a more decisive increase in rates and the fight against the economy overheating. But U.S. dollar has recently clearly lost its growth momentum, failing to rewrite recent highs in DXY in the second half of June. It seems difficult now to shift the expectations of the market from the current four rate increases this year, so it does not seem an easy task for markets to increase the bet for dollar based on healthy economic data.
Traders with a dollar should beware of other risks. Trade disagreements provoke an increase in inflationary sentiments and at the same time cause anxiety around future supplies. This creates an environment where inflationary risks will be mostly external and short-term, and the internal inflationary impulse caused by the growth of wages would be very restrained.
At the same time, there is some anxiety around the internal growth rate. The company's performance in previous periods has been so strong that it is unlikely that they will be able to maintain it in the upcoming periods. The same can be said about employment: strong indicators are unlikely to surprise markets and cause strong market reaction, but the weak numbers could create a wave of anxiety and the sale off for the USD. In this way the dollar may be held hostage to its previous power.
Few things can pleasantly surprise traders against the background of minimum levels of unemployment for the last 40 years. It seems that now the most powerful support for the dollar is the weak data of the remaining world and the demand for security due to trade wars, rather than strong statistics from the U.S. themselves, because it is not able to cause a review of expectations about monetary policy.
Simply put, traders should beware of a strong reaction to the dollar weakening in the case of weak data (employment growth is less than 150K and the increase of unemployment rate). If the data exceed the expectations, it could be seen as just another strong release in a series of impressive statistics from the United States. Since these strong data are not able to influence fundamentally the prospects of monetary policy in the upcoming months, the market reaction can be very moderate and short-term.
Disclaimer: This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments.
Trade Responsibly: Trading CFDs and Spread Betting involve significant risk of loss,
