The dollar exchange rate on course for a new opening (Daily analysis 11.04.2023)

It is perhaps only now, after the Easter period, that exchange rates will start the quarter in earnest. The dollar may temporarily benefit from this, as Friday's labour market report did not turn out to be as pessimistic as other macroeconomic data published in early April might have suggested. As a result, the EUR/USD retreated under 1.09. On the other hand, the attitude towards the US currency has been extremely negative recently, and some investors may want to revert to previous market strategies. We expect the dollar to be pushed back to the defensive over time.

In March, the non-farm sector of the US economy gained 236,000 jobs. This is less than in the previous two months when job gains of 326,000 and 474,000 were recorded, respectively. Nevertheless, the reading can be taken positively, as a number of important indexes, led by the ISM indexes, disappointed at the start of the month. The unemployment rate fell to 3.5% from 3.6 to 3.5%. Wages accelerated by a fairly high 0.3% m/m, but their year-on-year dynamics continued to fade and took on a value of 4.2%, the lowest in a dozen months. This combination results in a renewed belief among investors that the Fed will, in the first days of May, make the last rate hike of the cycle by 25 basis points and into the 5.00-5.25% range.

At this point, the probability of such a move is more than 70%, whereas only a few days ago, it could have been estimated at less than half. At the same time, the EUR/USD, which at the beginning of the month was approaching 1.10, which was the February high, at which there was a sharp turnaround in quotations and the dollar regained its resonance, retreated to 1.0850. This ceiling could turn out to be the midpoint of a new temporary range for the euro-dollar exchange rate. In other words, the exchange rate could have turned from a fluctuation range of 1.05-1.0750 to 1.0750-1.10 in mid-March. The return of a stable trend of gradual dollar weakening will not, for the time being, be supported by uncertainty over the Fed's monetary policy outlook in the face of the turmoil in the banking sector and the growing risk of recession.

On Wednesday evening, the minutes of the March FOMC meeting will be published, providing an answer to the question of how strong the support for the continuation of rate hikes in the US is. The 1.10 barrier in EUR/USD quotations should eventually be broken through. We assume European monetary authorities will maintain a tighter monetary policy stance for longer than the Federal Reserve. Alongside positive balance of payments trends for the euro, this will be a key factor driving the euro up against the dollar and pushing the dollar exchange rate down.