Blowout US Employment Report

The US economy added an impressive 528,000 new jobs in July, blowing past estimates, to the highest print since February 2020 (then 714K revised), as per Friday’s release. More to it, Unemployment dropped to 3.5%, from 3.6% prior, returning to pre-pandemic and historically low levelsas this was the lowest figure since February 2020.

Wages remained elevated, since average hourly earnings grew 5.2% year-over-year, putting upward pressure on inflation. The only black spot of the report wad the participation rate, which backtracked again, to 62.1%, remaining well below its pre-Covid levels.

US President Biden called this an “outstanding” report, noting that almost 10 million jobs have been added since he took office, making this “the fastest job growth in history”.

Strong Labor Market vs Recession Prospects

The US economy contracted again in Q2, according to recent preliminary data, which was the second straight negative quarter. This sequence, is generally considered as a technical recession, although there is much debate around it.

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The Federal Reserve however, has dismissed such a designation, with Chair Powell pointing to the many areas of the economy that are performing “too well”, highlighting the strong Labor market. Given its solid performance, “it does not make sense that the economy would be in recession”according to his remarks.

Friday’s blockbuster employment report adds credence to the defiant stance of policy makers and allows them to continue to target high inflation, which has yet to show any signs of easing.

Fed Implications

Fears of a recession had cooled down expectations around the Fed’s tightening path, which had delivered another outsized 75 basis points last month, but had dropped its explicit forward guidance and Chair Powell had tried to prepare markets for the prospects of potentially slowing down the pace of rate increases.

Friday’s blockbuster employment report however, vindicates the Fed’s view on the economy and boosts chances for another outsized move on rates in September.

On Saturday, Fed Governor Ms Bowman seemed to be backing another 0.75% rate hike, saying that “similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way”

Earlier last week and before the jobs report, prominent hawk and voter Mr Bullard, had repeated his calls for taking rates to 3.75% -4% this year, which is higher than the 3.4% median forecast on the most recent staff projection (SEP) from June.

Markets are currently pricing in a 75 basis points increase in September, with 69.5% probabilities, according CME’s FedWatch Tool at the time of writing.

However, there is more than one month until the next Fed meeting and we are many data points away, which could shake up things, with the latest CPI inflation report due this Wednesday.

EUR / USD Analysis

The pair dropped on Friday after the blowout jobs report and the reinvigorated expectations around the Fed, ending the week with losses, while the technical outlook has not changed much.

EUR / USD had managed to stage a rebound following July’s two-decades lows, but this has so far been very limited and unable to move past key EMA200 (black line) and the 23.6% Fibonacci of the 2022
High / Low drop.

As such, downside bias is intact and risk of another test of parity remains alive, although bears will need fresh impetus for that, whereas 0.9856 is distant.

On the other hand, the common currency has shown resiliency after last month’s intense selling pressure and the aforementioned lows and has not lost the ability to take another crack at the critical 1.0270-1.0315 region.

Daily closes above it, could fuel further recovery towards 38.2% Fibonacci (1.0540), but it does not inspire much confidence at this stage. The upside continues to look unfriendly and contains many roadblock, with the first provided by the descending trendline from the 2022 high, at around 1.0410-20.