Euphoria on Wall Street, dollar in retreat

After an interesting week, the coming days will probably bring a little more calm. It has been a long time since data from the US labor market caused such high volatility. EUR / USD exchange rate it gained over 120 points throughout Friday. and since the publication of the NFP report, the upward movement amounted to almost 1 figure. Wall Street indexes have had a fantastic week.

The October declines were almost 100%. reduced. There was also a visible downward movement in the yields of American bonds. 2-year-olds reached the level of 4,82%. and securities with a 10-year maturity 4,50 percent. The market gives almost no chance for an interest rate increase. by the Fed in December and is counting on easing monetary policy in 2024. However, individual representatives of the Federal Reserve are trying to cool down the market euphoria.

The beginning of a trend change

Once again, it turned out that weak data from the American economy is good data for the market. Wall Street is experiencing euphoria and has had a fantastic week. The indices managed to make up for the October sell-off and looking at the charts one may get the impression that it has begun another growth impulse. However, we do not know how far it will take us.

The fact that the market does not believe in further monetary tightening is also evidenced by the decline in the yield of American debt. A similar reaction could be observed on government papers of other countries, including European ones. American 10-year bonds were at their lowest level since the end of September. In turn, 2-year securities showed on Friday the level last recorded at the end of August. Looking at a broader time horizon, Last week's discounts are cosmetic for now, although the movement triggered in recent days may be the beginning of a trend change.

USD is in retreat. The dollar index left a broad consolidation of 107,0 – 105,30. The chart shows a double top formation, which heralds a change in the trend. The theoretical range of declines is 103,6. There is also a lot happening on the main currency pair. The EURUSD rate "climbed" this morning to 1,0750 and approached technical resistance. The quotations are just below the horizontal level set by the lows from August and the highs from September. There is a level in the same place internal Fibo reversal (38,2%) downward movement from mid-July to early October. What does it mean? Quotes after reaching this ceiling may perform a short-term downward correction, which will reduce the recent increases to some extent. However, further increases should not be ruled out if the US macro data fits the scenario of what the Fed is currently pricing in.

The Fed is cooling down market sentiment

Friday NFP report disappointed with weak numbers and finally showed more clearly that the labor market is starting to normalize. 150 thousand new jobs are less than expected. We should also not forget about the fact that the previous two publications were revised down by a total of PLN 101.

It is also important that the unemployment rate rose to the highest level since January 2022 and amounted to 3,9%. Here it is worth paying attention to the Sahm rule (named after a former Fed economist), which at the same time is considered a recessionary indicator. It has signaled every crisis since 1970. This rule states that a 0,5 percentage point increase in the three-month average unemployment rate indicates a recession. For the indicator to start sending a warning light, subsequent readings of the US unemployment rate would have to remain at 4%. for three months in a row. There's not much left for this to happen.

representatives Federal Reserve However, they are trying to cool down market sentiment. Richmond's Barkin called the NFP result welcome a sign of normalization of the labor market. However, he pointed out that further decisions would depend to a greater extent on inflation and the December one has not been decided yet. Kashkari also called the latest publication something positive, but at the same time noted that the Fed should not overreact to one month's data and emphasized that it is too early to say whether further increases in the cost of money are necessary or not.

Source: Łukasz Zembik, OANDA TMS Brokers