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With the Fed laser-focused on soaring inflation, the jobs numbers might not be as important to the markets - unless they telegraph an impending recession.

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What's going on

Safe haven flows have been helping the dollar lately, with yields growing ahead of expectations that the Fed will commit to raising rates aggressively in its bid to combat inflation. One of the mechanisms of growth from the demand side is for production to be driven forward by increased demand. That is the rationale given for the expanded monetary policy, and interest in increased government spending.

The problem for the US economy since early 2021, however, is that real wage growth (wage growth adjusted for inflation) has been negative. Even though consumers have more cash available, there is an absence of spending. So, organic demand lingers, despite the massive increase in the monetary base.

What happens now?

This disconnect between growth and monetary base is one of the salient factors fuelling fears of a recession. The US reported already one quarter of negative growth, and if the second quarter continues to be negative, then it would officially be a recession. The NFP data on Friday would complete the Q2 employment data. With job creation above 250K/month, the narrative is that the labor market is still recovering jobs lost during the pandemic.

But a decline in added jobs or an increase in the unemployment rate could rattle markets. Jobs numbers typically are a lagging indicator, and if the labor market is showing signs of weakness, it could mean Q2 GDP figures will be disappointing. That opens the question of whether the Fed will pare back its hiking.

June NFP is forecast at 268K compared to 390K last month, with the unemployment rate expected to remain steady at 3.6%

EUR/USD breaks to 20-year low

The EUR/USD pair has legged lower to a 20-year low following the breakdown of the May 13 $1.035 support. The gap makes downward momentum difficult to battle, but there is robust support at the 38.2% inverse Fibonacci near $1.018.

Over the near term, the 61.8% inverse Fibonacci near $1.008 represents a risk of successfully reaching parity. Lack of demand there will open the door to the 100% inverse Fibonacci near $0.998. This would be a textbook example of the ‘measured move’.

For the euro to return to a healthier state, bulls must recapture $1.035 and the weekly open of $1.042. A growing number of longs could lend a hand to alternate the near-term trend since a divergence can be observed already. This should provide a reason for building momentum toward the golden ratio of $1.0565 as this is the resistance responsible for the recent risk-off-seeking behaviour.

Source: Spreadex trading platform

Key takeaways

The dollar has been strong lately because the Fed is hiking rates to fight inflation, but the US economy is suffering from negative real wages and a lack of demand.

Fears of a recession have exacerbated amidst negative growth and if Friday’s report confirms the labor market is in a worse state than forecast it might force the Fed to dial back its hiking rhetoric.