A pause in the US dollar decline (Daily analysis 7.06.2021)

The US jobs market disappointed in May once again, yet the details of the latest US Department of Labor report point to supply-related issues. Nonetheless, the pace of recovery does not suffice an immediate policy response from the Fed.

The US dollar tries to bottom out. Namely, the US dollar index has so far failed to breach the 90.00 handle, and the recent EUR/USD advance has faded around the 1.2250 mark. This week US inflation figures and the European Central Banks’ meeting are the most important events in the developed markets. In the EMEA space, the National Bank Poland policy announcement will be watched closely as the monetary authorities inch towards a more restrictive policy. The money markets have already priced in a hefty dose of tightening. One must remember that NBP may yet again confirm its renown as the most dovish central bank in the CEE3 and partially push back rate expectations, simultaneously putting an end to the zloty’s recent strong performance.

US jobs market woes continue

The US economy added 559,000 jobs in May. This result is much better than in the previous month, but still far below market expectations. The return of employment to pre-pandemic levels has been slow amidst the strength of consumption, the condition of the red-hot industry and rising real estate prices. Supply-side restraints are largely responsible - labour demand is strong, but companies are struggling to fill vacancies. The number of full-time jobs is still more than 7.5 million below the first part of 2020.

This is important as the recovery in this part of the economy will determine how quickly the Federal Reserve will cut off the monetary stimulus. The current situation is worrying because the labour market puts upward pressure on wages. Suppose the distortions related to the reopening of the economy combined with the impact of various allowances and benefits do not weaken. In that case, it will be a reason for the monetary authorities to take a different look at the balance of risks and pay even closer attention to price pressures. It is probably too early for the Fed to change its attitude. However, in the coming days, the most important market data will be the US inflation forecast, which may approach 5%. The European Central Bank meeting will also be very relevant for the dollar against the euro. We expect the European Central Bank to declare its faithfulness to the extremely soft policy, which should support the view that the dynamics of the depreciation of the US currency have temporarily expired.