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Daily Forex Chart Analysis: Strong US NFPs Fuel Fed Upside Odds; Will the EUR/USD reach parity soon?

    In this photo, a euro coin rests on a dollar banknote, November 26, 2010 in London, England.
The euro is under increasing pressure as the US labor market posted solid gains in July, raising expectations of a more aggressive Federal Reserve – Photo: Getty Images

Non-farm payroll employment in the United States increased by 528,000 in July, more than double what the market consensus had previously expected, and the unemployment rate fell slightly to 3.5%, while pressure wages continued to surprise on the rise.

This is an exceptionally strong US labor market report in July, allaying, at least in the short term, fears of a sharp drop in economic activity after the technical recession in the United States in the second trimester. Above all, the unexpected US labor market data bolstered market expectations for future Fed rate hikes, driving the US Dollar (DXY) up sharply.

Fed futures are currently allocating a 65% chance of a 75 basis point hike in September, with the Fed’s implied target rate rising to 3.13%. Longer-term Fed futures rates also rose, with the December implied rate rising slightly to 3.7% from 3.5% last week, which effectively forecast a full 25 basis point increase. base.

Chart of the Day: Fed Rate Futures Spike Following US Labor Market Report

Fed forward interest rate chart
Fed Implied Forward Rates (September 22, December 22, March 23) – Photo: Capital.com; Source: commercial view

Forex market today: USD is king

  • Friday’s European market close saw the dollar index (DXY) climb to 106.8, 1% on the day.
  • EUR/USD dipped to 1.016, shedding 0.8% on the day, while GBP/USD fell to 1.206, also losing 0.8%.
  • The Japanese yen was the worst performer among the major currencies, with USD/JPY crossing the 135 mark (+1.8%), due to a widening in yield spreads between Treasuries and bonds of Japanese State (JGB).
  • Rising US rate expectations and growing geopolitical tensions between China and the United States following the visit to Taiwan by US House Speaker Nancy Pelosi also hurt Australian dollars ( AUD) and New Zealand (NZD), both of which recorded declines of more than 1% against the US dollar. American dollars. China’s foreign ministry has announced it will cancel climate change and military talks with the United States.
  • The Canadian dollar (CAD) and the Swiss franc (CHF) lost 0.6% and 0.9% respectively against the dollar.

Currency Strength Matrix – August 5, 2022

A forex chart that compares nine major currencies with each other, including USD, EUR, GBY, JPY, CHF, AUD, NZD, CAD and NOKCurrency Strength Matrix as of August 5, 2022 (5:00 p.m. GMT) – Photo: Capital.com

Euro-dollar (EUR/USD) – Chart analysis: eyes on 1.00?

Table of EUR/USD yield spreads vs vs 2 yearsEUR/USD vs. US/Germany 2-Year Yield Spread Chart as of August 5, 2022 – Photo: Capital.com / Source: Tradingview

July’s US labor market report was a blow to EUR/USD, potentially ending the pair’s brief, weak uptrend that began after the Federal Reserve meeting in July.

Macroeconomic fundamentals between the US and the eurozone continue to diverge, with the US showing resilience on the external balance and labor market fronts, while the EU is on the brink of a severe recession due to the collapse of consumer and business confidence as a consequence of the effects of the gas crisis.

US/EU 2-year yield spreads widened to 275 basis points, reaching new highs since May 2019, already trading as if EUR/USD were at parity.

The next key figure is the July US CPI print, released on August 10. A strong impression of US inflation would seriously increase the chances of seeing another 75 basis point hike by the Fed in September, which would lead the EUR/USD to retest the parity level.

Live chart Pound-dollar (GBP/USD): BoE rate hikes alone not enough for the pound

The Bank of England (BoE) raised its bank rate by half a percentage point to 1.75% at its August meeting, the biggest UK rate hike in 27 years, but warned that the UK economy is likely to enter a prolonged recession in the fourth quarter of this year.

The BoE expects inflation to peak at 13.3% in October, but rate hikes will be decided meeting by meeting, disappointing pound bulls.

As we have said before, if the US economy continues to be strong, there is a risk that the yield spread between Treasuries and gilts will widen, putting downward pressure on the rate. GBP/USD exchange rate.

The robust reading of US non-farm payrolls in July reinforces the case for a widening gap between US and UK macro fundamentals, which is bad news for the pound.

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The next level of support on the daily chart is at 1.195 (low from July 26). If GBP/USD breaks below this level, it will likely retest the psychological level of 1.18 and the 2-year low at 1.176.

Dollar-Yen Live Chart (USD/JPY): Decade Highs In Sight Again?

The yen is once again experiencing the same nightmare it endured in the first half of the year, namely the inevitable widening of monetary policy divergences between the Federal Reserve and the Bank of Japan.

Following the release of the non-farm payrolls, USD/JPY is having its most positive daily session since June 17, crossing the 135 mark.

On the upside, the next hurdle is between 136.5 and 137.5 (June 27-28 highs). If this region is breached, the pair could test the multi-decade highs at the 139.40 level.

Higher-than-expected US inflation next week could strengthen the case for a September 75bps hike and revaluation on the future curve, pushing USD/JPY towards the 139.40 test.

Performance of currency pairs as of August 5, 2022

A forex chart showing the performance of the US dollar and euro against other currenciesPerformance of currency pairs as of August 5, 2022 (17:00 UTC) – Photo: Capital.com

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