US job market accelerates, the dollar takes a second breath (Daily analysis 09.08.2021)

In July, the US regained the most jobs in a year, and the unemployment rate fell strongly. This paves the way for a quick announcement of slowing down the pace of asset purchases and the dollar's appreciation.

The EUR/USD pair plunged below 1.18 and is testing the July lows - there is nothing left of the weakening of the US currency that followed the Federal Reserve meeting.

US job market accelerates rapidly

In July, the US economy recovered nearly 950,000 jobs lost during the pandemic. This is the best result this year (actually since August 2020), a result above market expectations and a result that stands in contrast to the low job growth suggested by the ADP report. Moreover, it was revised upwards by almost 120,000 jobs from the change in employment in the previous two months. The unemployment rate fell sharply, dropping from 5.9 to 5.4%.

The number of employed people is still more than 5.5 million short of pre-pandemic levels. The last two months with employment change show that labour supply is starting to grow. The extraordinary disruption from social transfers and the fear of Covid-19 is fading. There is no problem at all with demand - the number of vacancies exceeds 9 million. In any case: the labour market is making the progress that the Federal Reserve expected. In other words: the announcement of the decision to start tapering off asset purchases is virtually a foregone conclusion.

Jobs market recovery sealed QE's fate, inflation a key for rates lift-off

The most likely and optimal date is the September FOMC meeting, at which new macroeconomic forecasts will be presented. It cannot be ruled out that the clear hint that the monetary crisis stimulus is about to be cut will be made at the central bankers' symposium in Jackson Hole. It will take place on 26 -28 August. The positive impact of this factor on the dollar has broadly been used up; in order to crystallise a sustainable trend, it will be necessary to believe that in the second half of 2022, after the complete expiration of quantitative easing, interest rate hikes will begin.

While the decision to gradually abandon asset purchases is dependent on the condition of the labour market, the timing of the interest rate hike will rest on the persistence of price pressures. It is worth mentioning that Jerome Powell strongly emphasised in July that we should not expect a quick move in the rates following the end of the pandemic round of quantitative easing. Only the next few quarters will make it possible to verify whether the Fed was wrong in assuming that the rate hike would be only temporary. The market will keep an eye on Wednesday's inflation data, which rose above 5% in June, and the core rate rose at its fastest pace since the early 1990s. Moreover, a series of speeches by five FOMC members will be important, which could strengthen the positive outlook for the dollar.