05.07.202114:46 Forex Analysis & Reviews: Fed plans to slow amid discrepancy between indicators in the US labor market

Demand for euro began to rise again after the latest US labor market report showed a discrepancy on its indicators. At the same time, risk appetite returned amid news that central banks are starting to phase out the stimulus programs they implemented to combat the global recession that was triggered by the coronavirus pandemic.

In fact, China is already taking steps to boost lending through monetary changes, while the Federal Reserve announced last week that they are reconsidering cutting back bond purchases. Others such as Brazil, Mexico, Turkey and the Czech Republic have raised interest rates.

But there are also those who are not in a hurry to make changes. The European Central Bank and the Bank of Japan, for example, will most likely continue providing assistance to their economies, as they believe that the recent surge in inflation will pass soon.

Speaking of inflation, Eurostat released a report recently, according to which producer prices in the Eurozone rose at a faster pace in May due to a sharp rise in energy costs. They said PPI jumped 9.6% year-on-year after climbing 7.6% in April. On a monthly basis, the index increased 1.3%, after gaining 0.9% in April. The main driver was the 25.1% hike in energy prices. So, excluding energy, core inflation increased 4.9%.

Evidently, not everyone within the ECB agrees that inflation is causing problems for the central bank. Isabel Schnabel, for instance, said inflation will go beyond the target level for some time as the economy recovers, but will go back down after. Fed Chairman Jerome Powell adheres to a similar approach.

All ECB officials are meeting this week to discuss a change in its strategy for price stability.

Meanwhile, US politicians are unlikely to rush cutting monthly bond purchases, at least until fall this year. Many analysts already said they do not expect a rate hike until 2023, although 7 out of 18 surveyed Fed members predicted to see an increase next year due to growing inflation.

But besides inflation, there are other risks that could prompt the Federal Reserve to change their stance on monetary policy. One example is the data on employment, which last Friday indicated a discrepancy on its indicators. On the one hand, the US Department of Labor reported that the number of people employed in the nonfarm sector rose 850,000 in June, which is the highest rate since August 2020. The largest increase was observed in leisure and hospitality industries, followed by professional, business services and retail trade industries.

On the other hand, the unemployment rate in June increased to 5.9%, mainly due to the 18,000 decrease in household employment. The report also showed that average hourly wages rose 0.3% to $ 30.30, while the annual wage growth accelerated to 3.6%.

All this makes everyone wonder, especially Fed members, if the planned changes on bond purchases will harm the current recovery in the labor market.

As for other macro statistics, the US Department of Commerce reported that the trade deficit in May increased to $ 71.2 billion, from a revised $ 69.1 billion in April. Analysts had expected the figure to rise to $ 71.4 billion. Most of the deficit came because the value of imports jumped 1.3% to $ 277.3 billion, while the value of exports rose 0.6% to $ 206.0 billion.

With regards to the currency market, EUR/USD is starting to move upwards, and according to the trading charts, a lot depends on 1.1875 because jumping above it will result in a much larger increase to 1.1910 and 1.1975. Meanwhile, dropping below 1.1840 will push euro down to the bottom of the 18th figure.

Price movement should be driven by the upcoming reports on Eurozone and UK PMI, which will be released today. Data on France industrial production will also affect the markets, but it will not last long as US is celebrating "Independence Day", which means that many markets will be closed.