05.06.202309:43 Forex Analysis & Reviews: US rallies despite labor market figures

Mixed data on the US labor market failed to cap the upward potential of the US dollar. The currency managed to outperform the euro. What is more, the greenback opened a new trading week with a rise.

According to the data from the US Labor Department, in May, nonfarm payrolls increased by 339,000. This is an impressive figure as analysts had predicted no more than 190,000 jobs. In the private sector alone, 283,000 jobs were created, exceeding analysts' expectations of only 165,000.

Markets are considering this figure as exceptionally high. However, the unemployment rate in the US came as an unpleasant surprise. The indicator swiftly rose to 3.7% from 3.4% (with a forecast of around 3.5%). According to estimates, the labor force in the US increased by 130,000 (with a decrease of 310,000 in the number of employed and an increase of 440,000 in the number of unemployed).

Meanwhile, the average hourly earnings increased by 0.3% in May on a monthly basis. This was lower than the expected rise of 0.4%. In other words, the data points to the weakening of the US labor market.

Experts attribute the contradiction between the significant job growth and the simultaneous increase in unemployment to the fact that these indicators are based on two different surveys. One pertains to companies, while the other relates to households, complementing each other.

Against this backdrop, traders have become puzzled. They do not understand how to correctly react to such mixed data. This question remains unanswered at the moment. The current macroeconomic data boosted the dollar, which took advantage of the situation and surged, surpassing the euro. On Monday, June 5, the EUR/USD pair was hovering near 1.0693, an extremely low level seen recently.

Thanks to bulls, the EUR/USD pair briefly returned to the level of 1.0767. Then, the pair made a sharp reversal but failed to minimize the previous losses. As a result, the situation favored bears, who sent the EUR/USD pair to a low of 1.0710. Later, the situation stabilized somewhat but the asset was still far from previous highs.

According to analysts, the current unemployment reports are more important for the Federal Reserve as the regulator relies on them to make decisions on interest rates. Against this backdrop, traders stopped pricing in a June rate hike by the Federal Reserve. Thus, the likelihood of a rate hike fell to 28% from the previous 65%.

According to estimates, a possible pause in the Federal Reserve's rate hikes will have a negative impact on the dollar. Earlier, Patrick Harker, President of the Federal Reserve Bank of Philadelphia, stated that the regulator should skip at least one rate hike in June. It should be noted that P. Harker adheres to a dovish position and previously suggested something similar.

However, the decision of the Federal Reserve will be influenced by current macroeconomic data, which demonstrates that the demand for the labor force in the US economy remains high, especially in the services sector. Estimates unveiled that the labor market in the US remains tight. Meanwhile, core inflation is still sufficiently high and its decline is slower than expected by the Federal Reserve. This is an important argument in favor of a further rise in the rate at the upcoming meeting scheduled for June 13-14.

According to Christoph Balz, senior economist at Commerzbank, the recent reports are not only showing an increase in the number of jobs but they are also indicating cooling of the labor market. This will allow the Federal Reserve to remain stuck to its approach at the upcoming meeting. However, members of the FOMC may pause the rate hikes. Balz added that the regulator would assess all the events and tighten its monetary policy if necessary.

Recently, many Federal Reserve officials have supported the idea of pausing the rate hikes. The feasibility of such a step will be discussed at the June meeting. This measure is necessary to assess the delayed impact on the US economy and inflation.

Currently, market participants consider this scenario as the main one (with a likelihood of up to 70%). An alternative is a 25-basis-point rate hike to 5.25%-5.5%. However, if the Federal Reserve keeps the rate unchanged, the probability of a rate hike in July increases. Currently, the markets perceive this scenario as the most likely (50% in favor, the rest are against or undecided). Notably, a month earlier, investors and analysts expected a rate cut by the Federal Reserve in July.

At the same time, the chances of an interest rate increase in June remain low. Against this backdrop, experts are concerned about further weakening of the greenback. The current macroeconomic data indicates that the Federal Reserve will not raise rates in the first month of the summer. This is an important fundamental signal for major traders who are betting against the dollar. In the near future, the EUR/USD pair may rebound from the bottom it reached after the publication of the US labor market data.

Analysts are optimistic about the short and medium-term prospects of the EUR/USD pair. They anticipate an upward trend for the pair, with the nearest target being at 1.1000. If the pair surpasses the barrier at 1.0700, the dollar strengthening that started in May will continue.