Was Friday USD Decline a Correction? Rate Markets Suggest it was

was-friday-usd-decline-a-correction?-rate-markets-suggest-it-was

Despite relatively upbeat NFP report, the dollar was down on Friday. This is somewhat surprising as the odds of a Fed rate hike in March rose after the report. If before the report, the chances were 66%, then on Monday they rose to 70%:Currently the markets price in three rate hikes in 2021. It is amazing because just a year ago, not a single rate hike was expected until 2024!December US inflation figures due on Wednesday may lend more credibility to the story of the Fed rushing to withdraw monetary stimulus, which is likely to help the dollar start attacking its opponents again.The US economy added 199K jobs in December, more than twice below the forecast of 400K. Nevertheless, wage inflation smoothed out negative effect of the headline reading as it rose by 0.6% MoM beating expectations. Given persistent wage pressures, weak jobs growth can be regarded as a persistence of imbalances in the labor market, namely strong demand for labor and a lack of its supply. This is also indicated by the stuck 62% labor force participation rate, which barely responds to the surge in new vacancies in the United States that started in 2021:December CPI report is expected to show broad inflation at 7% and core inflation at 5%. It is quite bold to expect a positive surprise given such forecasts for the world’s first economy, but labor market dynamics remains powerful precondition for further inflation growth. The yield on 10-year bonds is approaching 1.8% and several Fed officials will speak this week, as well as the head of Powell for re-nomination for the post of FOMC chairman. In general, the dollar’s upside potential, in my opinion, has not been exhausted this week, and Friday’s downward movement should be regarded as a not quite planned correction.The EURUSD pair, despite the weakness of the dollar on Friday, remains in the range of 1.1180-1.1380. Markets are discussing a speech by Fed official Schnabel that the EU’s transition to alternative energy sources will put pressure on inflation and force the ECB to revise its forecast. The next official inflation forecast for the ECB will not appear until March, so support for the Euro from this front will not appear soon. In the first quarter, talks about tightening the policy will mainly concern the Fed, so it is reasonable to give preference to the dollar, as for the dynamics of EURUSD in the first quarter.Technically, the two nearest resistance zones for EURUSD can be at 1.1380 and 1.14150 (the upper border of the range and trend channel): As for the GBPUSD, tomorrow’s GDP report should strengthen the chances that the Bank of England will remain on a tightening trajectory and raise rates at its February meeting. Now the OIS markets are setting an 80% probability of such an outcome, and from this point of view, the pound retains the potential to strengthen, in particular against the Euro. The area of 0.8270-0.8280 looks like an attractive zone for EURGBP:

Source: Tickmill

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