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EURUSD jumped to 1.06 instead of consolidating below 1.05 after the release of a strong US jobs report. The decline in Treasury yields became the reason for the rally. Let’s discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

According to the September labor market report, the US economy is growing! Employment increased by 336 thousand (the highest pace in eight months). Data for August and July were revised upward. Unemployment has been at historical lows for the longest time in the last half-century. The best performance is recorded in industries (including education and healthcare) that lagged behind others during the recovery period after the pandemic. The data turned out to be hotter than expected; the more surprising are the strong EURUSD fluctuations.

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US employment dynamics

Source: Financial Times.

The market reacted immediately. Treasury yields updated 16-year highs, stock indices fell, and the possibility of the Fed raising the federal funds rate to 5.75% in 2023 rose above 50%. Before the September jobs report, investors were confident that the central bank had ended its tightening cycle and had begun to keep borrowing costs unchanged for a long period. The latest data should have encouraged FOMC hawks to call for a resumption of the monetary restriction cycle.

In fact, rising Treasury yields could effectively tighten financial conditions without requiring additional increases in the federal funds rate. The market does the Fed’s job. Although derivatives are signaling rising risks of higher borrowing costs in November and December, it is unlikely that there will be any.

History shows that the labor market situation can deteriorate very quickly in a short period. Therefore, the central bank must be very careful not to harm the economy in any way. It is possible that Treasury yields have reached their short-term ceiling. The price rebound from it triggered numerous purchases of shares and EURUSD.

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The rally in debt market rates is a key driver of the EURUSD decline. However, the euro has vulnerabilities. The eurozone economy is weak, rising oil prices are raising concerns about a repeat of the energy crisis, and Italy’s bloated public debt is once again attracting investors’ attention. According to Nomura, if Brent reaches $110 per barrel, EURUSD will return to parity. Experts from Rabobank and ING share the same opinion.

Euro vs. US dollar dynamics

   

Source: Bloomberg.

Weekly EURUSD trading plan

US dollar buyers simply couldn’t believe their luck. An unexpected decline in Treasury yields led to massive exiting EURUSD short trades. This allowed the euro to reach the required level of $1.0595, where sell orders were placed. Hold short trades for a while and see how events develop further. Will the market reevaluate the strong employment data, and how will September inflation data affect it?

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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