Those investors who expected to see a link between a strong US jobs report for January and an additional increase in rates in Jerome Powell’s speech had to exit trades. How did this affect EURUSD? Let’s discuss this topic and make up a trading plan.
Weekly US dollar fundamental forecast
After the impressive US jobs report and hawkish comments from Atlanta Fed President Rafael Bostic, investors expected Jerome Powell to send the financial markets to the bottom. But instead of linking the January jobs report to more federal funds rate hikes, he said the Fed’s policy is data-driven. If the US regulator sees stronger labor market and inflation numbers going forward, it will raise borrowing costs higher than investors expect. Minor changes in the stance of the Fed chairman contributed to the growth of US stock indices and EURUSD.
Dynamics of US stock indices
Source: Wall Street Journal.
According to Powell, bringing inflation to 2% will be very difficult. The scenario that high prices will disappear quickly is not a baseline for the Fed. The Fed chairman thinks the central bank will have to raise rates once more and then pause to see how the economy reacts to previous monetary tightening moves.
This phrase, together with the disinflation speculation, made the markets feel more optimistic. Jerome Powell’s speech at the Economic Club of Washington, DC, differed little from his speech at a press conference following the first FOMC meeting in 2023. He believes the Fed should focus more on long-term policy rather than rapidly changing financial conditions. Investors expected the surprisingly strong US jobs report for January to turn the Fed chairman into an aggressive hawk. It seems that the movements in the markets were because people who were expecting Powell’s punitive policy had to exit trades urgently.
Dynamics of US labor market indicators
Source: Bloomberg.
Due to the rebound of US stock indices, the euro reached the bottom. Its decline over the past four days was the fastest since October and faster than other G10 currencies. It is not surprising since EURUSD purchases have been an extremely profitable trade since the beginning of the year. Now the markets are prioritizing a possible acceleration of the Fed’s monetary restriction rather than the ECB determination. This allows Credit Agricole to predict the EURUSD fall to 1.05 in February-March. For the recession to continue, worsening eurozone macroeconomic data, widening bond yield spreads in the debt market, and dovish statements by the ECB are required.
Weekly EURUSD trading plan
EURUSD will determine its future direction after the release of US inflation data for January. In the meantime, the chances of EURUSD consolidation in the previously indicated trading range of 1.06-1.085 are growing. Meanwhile, add up to long trades entered on the rebound from support at 1.069 when level 1.0775 is broken out.
Price chart of EURUSD in real time mode
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