02.06.202317:55 Forex Analysis & Reviews: EUR/USD. May Nonfarm Payrolls and the controversial victory of the Democrats

Today, the euro/dollar pair approached the 1.08 level, but the May Nonfarm Payrolls dampened the upward momentum. It cannot be said that the published report was flawless - no, there are some flaws, which we will discuss below. However, EUR/USD traders interpreted the release as favoring the American currency. The dollar received situational support, allowing sellers to organize a small downward counterattack. Nevertheless, this does not negate that the published Nonfarm Payrolls have a mixed picture. The report did not strengthen the market's hawkish expectations and, therefore, will have a limited impact on dollar pairs.

The report needed to be more consistent. On the one hand, the unemployment rate rose more than expected: with a forecast of growth to 3.5%, the indicator reached 3.7%. Overall, unemployment remains at 50-year lows but unexpectedly increased after a two-month decline (down to 3.4%). The pro-inflationary indicator also ended up in the "red zone." For example, the average hourly earnings level declined to 4.3% y/y, while most experts expected the indicator to remain at the April level (4.4%). There is nothing catastrophic here either, but it's a "mediocre" result that did not support the greenback significantly.

All other components of the May Nonfarm Payrolls were in the "green zone," overshadowing the flaws of today's release. First and foremost, the increase in the number of employed persons in the nonfarm sector was impressive. The indicator jumped by 339,000, almost twice exceeding the forecast value (180,000). The number of employed persons in the private sector also significantly increased by 283,000 (with a forecast growth of 160,000). The labor force participation rate remained unchanged in May compared to April (62.6%), while experts predicted a slight decline.

Overall, the release favored the greenback. However, it had a limited impact on the EUR/USD pair. Nonfarm Payrolls failed to strengthen traders' hawkish expectations regarding the Federal Reserve's future actions. Such a fact would have helped dollar bulls turn the situation in their favor. But according to the CME FedWatch Tool, the probability of a 25-basis-point rate hike decreased to 29% after the release. Just yesterday, traders assessed the chances of a rate increase at 35%.

Against the backdrop of such ambiguous results, EUR/USD sellers were only able to regain a few tens of points. As a result, the pair remained around the 1.07 level.

The dollar is also finding it difficult to gain momentum for another reason. Market interest in risk has increased due to recent events in Washington. Yesterday, the US Senate approved the decision of the House of Representatives, which postponed the American default for at least two years (theoretically, it could have occurred as early as Monday, June 5). After lengthy debates between Biden and House Republican Leader McCarthy, the debt ceiling was suspended.

The parties agreed to suspend the debt ceiling until January 1, 2025. This is a significant moment, as the explosive problem of a potential default is now postponed until the US has a new president (or the same one - Joe Biden).

According to most analysts, this is a major victory for the Democrats. For the Democratic Party (especially for Biden), a similar situation needed not to repeat itself next year during the pre-election race. Meanwhile, Republicans were interested in having such significant leverage of influence. Therefore, many of them are infuriated by the compromise. Some Republican congressmen have already started calling for Kevin McCarthy's resignation because the expected reduction in government spending (approximately $1.5 trillion over the next ten years) turned out to be three times smaller than initially insisted upon by Republicans.

However, it is worth noting that Biden also made compromises by agreeing to limit spending growth. The extremely left-wing Democrats negatively received this fact. They called the debt agreement a "Biden capitulation" due to tightening requirements for low-income Americans receiving assistance. The deal was criticized by, among others, the leader of the Progressive Democrats in the House of Representatives, Pramila Jayapal, and one of the most prominent representatives of the left-wing Democrats, Alexandria Ocasio-Cortez.

In other words, the American political scene is again shaken by scandals, this time post facto, when the key decision has already been made. There were enough votes in both houses of Congress to pass the bill, and default was avoided. Therefore, the so-called "political" factor will gradually weaken, as the safe dollar has effectively lost a significant advantage.

Conclusions

Today's published nonfarm supported the greenback, although the release had some flaws (the unemployment rate slightly increased, and wages grew weaker than forecasted). At the same time, hawkish expectations regarding the Federal Reserve's future actions continue to weaken, as evidenced by the data from the CME FedWatch Tool. In such conditions, it will be difficult for EUR/USD sellers to succeed, especially against the backdrop of the conclusion of the negotiation saga on preventing a default.

Another noteworthy point: despite the slowdown in consumer price index growth in the eurozone, the European Central Bank (ECB) continues demonstrating a "hawkish" stance. For example, Christine Lagarde made hawkish remarks yesterday, stating the need to tighten monetary policy parameters further. The minutes of the ECB's May meeting, published yesterday, also supported EUR/USD buyers. The document stated that several members of the Governing Council insisted on a 50-basis-point rate hike.

Thus, the current fundamental background does not contribute to further downward movement. The weekly chart indicates that EUR/USD bears have effectively lost the initiative on the pair: after declining to the 6th figure's base, the price returned to the level of the weekly open (1.0723). Therefore, the current declines can be seen as an opportunity to open long positions. The target for the upside movement is the 1.0800 level. At this price point, the lower boundary of the Kumo cloud coincides with the middle line of the Bollinger Bands indicator on the D1 timeframe.