FX.co ★ EUR/USD: while the market is wondering if the June NFP can force the Fed to turn from the tightening course, the dollar leaves no hope to continue its offensive, and the euro is looking for reasons to decline

The data on the US labor market released at the end of last week stopped the victorious march of the greenback.

Although the US economy created more jobs in June than expected, market participants believe that the pace of wage growth and the share of the economically active population are not high enough to further accelerate inflation and justify the Federal Reserve's plans to tighten policy.

"The latest report of the US Department of Labor, apparently, was not so unambiguous as to force the Federal Reserve to announce a reduction in QE in the near future. The market thought that the central bank would signal this at a symposium in Jackson Hole in August. However, the June release on US employment suggests that this may happen a little later," Westpac strategists noted.

The number of jobs in the US non-agricultural sector increased by 850,000 last month after rising by 583,000 in May. At the same time, the unemployment rate in the country rose to 5.9% from 5.8% in the previous month. The growth of the average hourly wage in monthly terms was 0.3% against the forecast of 0.4%.

Following the results of Friday's trading, the greenback fell by almost 0.5% against its main competitors, including the euro, which was due to some weaker details of the US employment report.

Investors also adjusted their positions ahead of a long weekend in the United States due to the celebration of Independence Day.

As a result, the USD was forced to retreat from the previously reached three-month highs around 92.70 points.

The dollar weakened slightly as part of profit-taking after the publication of US employment data. However, this decline is unlikely to be the beginning of a significant correction, TD Securities analysts believe.

"After the Fed's hawkish turn in June, the dollar has become more sensitive to the strength of internal data, while some DM and EM counterparts are still struggling with COVID-19 outbreaks," Maybank analysts note.

"Thus, this strength of the dollar may continue for some time, and the atmosphere of an optimistic attitude towards risky assets will not become absolutely detrimental to the dollar," they added.

Although some details of the June report on US employment disappointed investors, it should be acknowledged that the growth in the number of jobs by 850,000 is a fairly strong figure.

According to US President Joe Biden, this is a sign that his economic strategies and methods of combating the pandemic are working.

"This is historic progress, leading our economy out of the worst crisis in 100 years, partly due to achievements in the field of vaccination and the fight against the pandemic, as well as other elements of the American rescue plan," he said.

Friday's labor market report suggests that the United States may return to pre-pandemic employment levels earlier than expected, White House economic adviser Jared Bernstein said.

According to some estimates, at the current pace, the US economy will need less than 10 months to restore the remaining 7 million jobs lost in the pandemic.

The Fed will probably need to start raising interest rates in late 2022 or early 2023, as an increase in government spending in the United States keeps inflation above the long-term average target, analysts of the International Monetary Fund (IMF) believe. They expect that the Fed will begin to reduce the volume of the asset purchase program in the first half of 2022.

The Fund's analysts also revised upward the estimate of US GDP growth for 2021 – from 6.4% to 7%. If this forecast is confirmed, the US economy will show the highest growth rates since 1984.

This week, investors will focus on the minutes from the Fed's June meeting, which will be published on Wednesday.

Market participants will be waiting for new details regarding the potential schedule for curtailing QE after the relatively hawkish point forecast of the central bank and the press conference of Fed Chairman Jerome Powell, strategists at TD Securities note.

"The minutes from the June FOMC meeting are likely to confirm the hawkish shift in the Fed's policy. The appearance of new information for traders about when the central bank can start reducing the volume of asset repurchases will support the dollar," analysts at Commonwealth Bank of Australia believe.

So far, the greenback is forced to take a defensive position.

On Monday, the USD index traded with a decrease of more than 0.1%, at the level of 92.30 points.

If the bearish momentum increases, the index will meet the initial, albeit insignificant, support around 92.00 before 91.50. The last level is strengthened by the 200-day moving average at 91.45.

On the eve of the release of the US employment report, the picture for the euro began to look completely hopeless.

If all the components of the report turned out to be positive, the EUR/USD pair could well go to the March lows around 1.1700.

However, after the report was published and hitting the lowest levels since April, the pair was able to win back some losses.

The fact is that strong data on the US labor market were included in the quotes during the week, and before the long weekend in the US, investors decided to take profits on long positions in USD.

The main currency pair tried to develop a rebound from three-month lows on Monday, but faced strong resistance in the area of 1.1875-1.1880.

Today's report for the eurozone showed that the composite index for business activity of the currency bloc, according to the final assessment, rose to 59.5 in June from 57.1 points recorded in May.

However, the main problem is that these data look outdated against the background of increasing fears about the spread of the more contagious COVID-19 "Delta" strain in the eurozone, which threatens to disrupt plans for the opening of European countries and is fraught with the introduction of new restrictions.

Thus, despite the current rebound, EUR/USD has reasons to resume the decline.

"On Friday, the pair fell to 1.1805, after which it rebounded and ended trading with an increase of 0.14% near 1.1864. The downward momentum weakened, and the chances of a break below 1.1800 decreased. However, only a breakdown of the resistance at 1.1915 will indicate the extinction of downside risks. To revive the bearish momentum, the pair needs to settle below 1.1835 in the next two days, " UOB analysts said.