07.07.202309:16 Forex Analysis & Reviews: US dollar gains momentum on strong US employment data

By the end of this week, the American currency gained confidence, found its footing, propelled by strong employment data in the United States. Initially, the US dollar fell, but later regained stability. However, the euro is also active and strives to take the lead, occasionally dethroning the greenback.

Earlier, the American currency received significant support after the publication of the minutes from the Federal Open Market Committee's (FOMC) latest meeting. The document reaffirmed the Federal Reserve's hawkish stance. While some Federal Reserve policymakers are ready to raise rates by 25 basis points, others consider an additional rate hike imprudent.

The trajectory of the US dollar was disrupted by the latest batch of US macroeconomic data. Initially, USD declined, but it quickly rebounded and stabilized. At the same time, the euro is also striving for balance but periodically pushes forward, overtaking the American currency. As of Friday morning, July 7th, the EUR/USD pair traded near 1.0890, attempting to recoup prior losses.

Currency strategists at UOB Group believe that a breakout above 1.0925 would weaken the downward trend of EUR/USD. However, downside risks for the euro persist, and it may decline to 1.0835 and slide down even lower. Nevertheless, the situation has improved, and downward pressure has eased, bolstering the euro's confidence. In the near future, the EUR/USD pair will likely remain in a wide range between 1.0855 and 1.0925, an outlook by UOB Group predicts.

The recent USD surge can be attributed to strong ADP reports on the American labor market. Current data indicates that the ADP employment index in the US private sector reached 497,000 in June, more than double market expectations, thereby demonstrating significant private sector employment growth.

Analysts note that the current US macroeconomic data contradicts claims that the world's largest economy is on the brink of a severe recession. The near half-million employment growth recorded in just one month can sharply boost the incomes and spending of Americans. Importantly, this indicator serves as a key driver of US GDP.

Experts consider ADP data one of the most important indicators of the American labor market. If the current trend persists, the markets should brace themselves for further substantial rate hikes by the Federal Reserve. According to analysts, a robust labor market in the US will reignite interest in the dollar, which has lost some of its positions. Following the publication of the ADP report, the US Dollar Index (USDX) immediately rebounded by 0.3%, recovering a significant portion of its losses.

Experts expect this positive trend to continue, fueled by US initial jobless claims data. For the week ending July 1, jobless claims increased by 12,000, reaching 248,000. This exceeded analysts' expectations of an increase to 245,000 from the initial reading of 239,000.

Additionally, business activity in the US services sector saw an upturn in June. During the reporting period, the ISM Services PMI index rose to 53.9 points from 50.3 in May, surpassing market expectations that predicted a rise to 51. This favorable development impacted the dynamics of the greenback, although its growth turned out to be short-lived.

According to the ISM, accelerated growth in the US services sector can be attributed to increased business activity, the emergence of new orders, and a satisfactory level of employment. Moreover, business conditions in the United States remain stable.

Nevertheless, experts are cautious in drawing conclusions about inflation, the possible onset of a recession, and near-term economic prospects. Market participants are focused on the release of US non-farm payrolls for June, due on Friday, July 7. Preliminary estimates suggest unemployment in America has decreased to 3.6% from the previous 3.7%.

Market participants are also awaiting reports on industrial production in Germany. Current forecasts indicate that in May, this indicator remained unchanged from April when it grew by 0.3%.

Unemployment data in the United States will provide signals to the markets regarding the Federal Reserve's future actions concerning the key interest rate. It is worth noting that the Federal Reserve considers data on the American labor market when making rate decisions. Previously, the regulator halted an extended period of tightening its monetary policy and kept the interest rate unchanged, despite high inflation.

Currently, the overwhelming majority of analysts (92.4%) are pricing in a 25 bps hike in July, starting from the current level of 5%-5.25%. Others expect the rate to remain unchanged. It is important to note that higher interest rates will further strengthen the US currency.