EUR/USD: Fed will raise rates in December no matter what the print for US jobs is today
Macroeconomic overview:
- U.S. job growth probably slowed further in September as Hurricanes Harvey and Irma left displaced workers temporarily unemployed and delayed hiring, the latest indication that the storms undercut economic activity in the third quarter.
- The market expects the Labor Department's closely watched employment report on Friday will likely show that nonfarm payrolls increased by 90k jobs last month after rising by 156k in August. Our forecast is slightly more optimistic at 120k.
- The projected job gains for September would be the second smallest this year and well below the 175k monthly average for the 12 months through August.
- The employment report would join August consumer spending, industrial production, homebuilding and home sales data in suggesting that the hurricanes will dent economic growth in the third quarter.
- But there is no doubt that a weak employment report should not change views the Federal Reserve will raise interest rates in December. Fed Chair Janet Yellen cautioned last month that the hurricanes could "substantially" weigh on September job growth, but expected the effects would "unwind relatively quickly."
- The Federal Reserve will need to raise U.S. interest rates further to keep the economy on track to full employment and the Fed's 2% inflation goal, Kansas City Federal Reserve Bank President Esther George said. She added that waiting too long for another rate hike may force the Fed to raise rates aggressively later, sending the economy into recession, or could foster financial imbalances if investors respond to low rates by placing even riskier bets.
- The long-term trend in annual U.S. economic growth may be as low as 1.5%, San Francisco Federal Reserve President John Williams said, a somber view that implies perpetually low interest rates and a difficult hurdle for the Trump administration's promised economic surge. Williams said the Fed does need to continue raising short-term rates, with unemployment low and a conviction on his part that a recent lull in inflation will prove temporary. Williams said he does not need to see inflation itself improve to support another rate hike this year, as long as other data answer the question of whether the economy continues to grow. Long-term rates should rise as well as the central bank reduces its long-term asset holdings, he said.
- Philadelphia Federal Reserve Bank President Patrick Harker said he is still penciling in one more rate hike this year and three next year.
- Yesterday, the Constitutional Court ordered the suspension of Monday’s meeting of the Catalan Parliament, when local MPs were expected to vote on independence. Also, Banco Sabadell stated that it will move its headquarter (but not its staff) out of Catalonia and other banks based in the region are planning the same. While the risk of a near-term accident has probably decreased, we still expect a big confrontation between Madrid and Barcelona next week.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or
remove ads
.
Technical analysis and trading signals:
- The break and close below 1.1720, 38.2% fibo of the June-September rise on Thursday increases bears’ confidence. The EUR/USD has continued to slide and makes a new trend low in late Asia/early Europe.
- As we have signaled for some time, 50% fibo of 1.1119-1.2092 at 1.1605 is next support eyed and probably the bears’ target. We think, however, that this level will not be broken and using current drop to open a long position for long-term target at 1.2400, which we think is a fair value for EUR/USD, could be a good idea.
- EUR/USD is likely to remain range-bound in the next days, waiting to take its cues from the yield market. For the latter, the US CPI numbers on Friday next week will be the key thing to watch.
