A strong US jobs report for September resulted in another sell-off of stocks and bonds. The treasury yield has been up, and the US dollar strengthened. What’s the reason? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
For decades, strong US domestic data have driven the US stocks up and encouraged investors to sell Treasuries amid the expectations of the robust growth of the GDP and corporate earnings, as well as the rise in inflation. In 2022, everything has been turned upside down. The US employment grew by 263,000 in September, more than Bloomberg had expected, and unemployment declined from 3.7% to 3.5%. The S&P 500 has been down by 2.8% while Treasury yields hit a twelve-year high. Investors have nothing to buy. They are lured by the US dollar as a safe haven, supporting the EURUSD downtrend.
Although employment growth was weaker than August’s 315,000 or the average of 400,000 in the first half of the year, it is still higher than the 50,000-100,000, the critical mark that suggests the unemployment rise. If the labour market is cooling, the loss in employment is insignificant. The Fed still has a lot of work to do, and an increase in the likelihood of a 75-basis-point hike in the federal funds rate in early November to 82% looks natural. The derivatives market also raised the expected ceiling on borrowing costs from 4.615% to 4.625% by March 2023.
Dynamics of expected Fed rate
Source: Bloomberg.
Today, the market has developed such a situation that the forecast for the Fed rate determines the trends in the stock indices, and the federal funds rate depends on the reports on employment and inflation. Despite the slowdown in the average wage growth from 5.2% to 5%, the latter figure is still very high. A drop in wage growth is not enough for the Fed to stop monetary tightening. It is too early to expect the Fed’s dovish shift. The Fed will suspend its aggressive monetary tightening if the labour market cools down significantly, inflation slows down, and (or) there is intense turmoil in the financial market. None of the conditions is fulfilled, so the Fed can safely continue hiking the rates.
Dynamics of US employment
Source: Financial Times.
The S&P 500 is falling amid the concerns that the Fed will go too far and cause a recession in the US economy in a few decades. The combination of a fast rise in the federal funds rate, the GDP growth, moving towards a downturn, and weak corporate reporting suggests that there is a bearish trend in the broad stock index, which presses down the EURUSD.
According to FactSet, the consensus estimate for third-quarter earnings per share for S&P 500 companies is 2.6%. This is significantly lower than 9.8% in the second quarter and is the weakest reading since July-September 2020. However, if the actual data exceeds the forecast, this will be the basis for a rebound in the stock market, supporting the euro.
Weekly EURUSD trading plan
Now, the expectations of the US core inflation rise to 6.5% should press down the EURUSD towards 0.965. Hold down the shorts entered on the rise to 1 and 0.995 and boosted on the US jobs report.
Price chart of EURUSD in real time mode
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