FX.co ★ EUR/USD. The Shutdown Behind, Non-Farms Ahead

On Thursday, the euro-dollar pair set a two-week high at 1.1636. Traders celebrated the end of the shutdown, which lasted for 43 days. This is the longest such pause in U.S. history, and the long-awaited happy ending has heightened interest in risk assets, including the euro. Meanwhile, the greenback is under pressure, with the U.S. dollar index declining toward the 99 level, even though it reached a five-month high of 100.20 just a week ago.

The mere fact of ending the shutdown is a positive fundamental factor for the dollar. Preliminary estimates suggest that the six-week U.S. government shutdown reduced Q4 GDP growth by 1.5 percentage points. While losses are partially compensated, they are only partially mitigated. Therefore, the reopening of all government services and institutions is undoubtedly positive news for the greenback.

However, market participants have interpreted recent events unfavorably for the U.S. currency. Essentially, traders have swiftly shifted to a wait-and-see stance regarding the key macroeconomic reports that were not published on time due to the shutdown. It appears that some of them (for instance, the October Non-Farm Payrolls) may not be released at all. Nevertheless, the market is currently driven by unfavorable expectations for the greenback. In fact, traders in the EUR/USD pair are implementing the trading principle of "buy on rumors..." However, this time, the second part of the classic principle ("...sell on facts") may be less relevant. If the Non-Farm Payrolls disappoint again, the "buy on rumors, and buy again on facts" strategy may become appropriate.

Let's recall that the shutdown began on October 1, while the official U.S. labor market data for September was scheduled to be published just a day later, on October 3. We can assume that by then, specialists at the Bureau of Labor Statistics (BLS) had already gathered the bulk of the data. Therefore, the September report will likely be published soon—probably next week. However, the October data remains highly questionable. According to Bloomberg, the report on October CPI growth, as well as likely the October labor market data, will not be released "due to the effects of the shutdown, which disrupted the data collection process."

Despite these circumstances, even the September Non-Farm Payrolls could sway the outcome of the December Fed meeting. At least, this is true in terms of market expectations. Currently, the probability of a rate cut at the December meeting stands at 55%. The market assesses this scenario as 50/50 amidst conflicting signals from the Fed.

For instance, Boston Fed President Susan Collins, who has voting rights this year, stated that she is not prepared to support another rate cut this year. According to her, the bar for further monetary easing is "quite high," considering inflationary risks and the lack of information. In this context, Collins added that, in her view, it would be reasonable to maintain the current interest rate "for some time" to balance inflation and employment risks.

A similar position was earlier voiced by St. Louis Fed President Alberto Musalem, who also has voting rights this year. He pointed to upward inflation risks while noting that the labor market is at full employment, "even though it has significantly weakened recently."

Amidst hawkish messages, opposing signals are also being sent. Several Fed representatives have expressed concern about the state of the U.S. labor market, while leaving open the possibility of an additional rate cut towards the end of this year. Among them are Christopher Waller, Stephen Miran, Mary Daly, and Michael Barr. Two of them (Waller and Miran) explicitly supported a 25-basis-point rate cut in December.

September Non-Farm Payrolls could tip the scales either way. If the report significantly underperforms expectations, the greenback will face additional pressure, and the EUR/USD pair could approach the boundaries of the 17 figure or even settle above the resistance level of 1.1700 (the upper boundary of the Kumo cloud on the D1 timeframe). Preliminary forecasts suggest that the unemployment rate in September should remain steady at August's level (4.3%), with the number of employed in the non-farm sector expected to grow by 50,000. While this is not a strong result, it is certainly not bad, considering that in August the figure was negative (at -5,400). The composition of this component (the indicators for full-time and part-time employment growth/decline) is also important. For example, in September, the full-time employment component increased by 8,700, while the part-time component increased by 6,300. This fact provided additional support for the Australian dollar. As is well known, growth in full-time employment positively affects wage dynamics, as full-time positions typically offer higher pay and greater social security benefits.

Thus, even if the report comes out at the forecast level (not to mention in the "green zone"), the Aussie will receive significant support, including against the U.S. dollar. In my opinion, the pair retains the potential for further growth.

From a technical perspective, the buyers of the pair tested the resistance at 1.1620 (the upper line of the Bollinger Bands) on the four-hour chart but were unable to consolidate above it. Meanwhile, the pair is above all lines of the Ichimoku indicator (including above the Kumo cloud), which has formed a bullish "Parade of Lines" signal. It is reasonable to consider long positions on the pair once buyers of EUR/USD surpass the 1.1620 resistance level. The next targets for the upward movement are 1.1650 and 1.1700 (the lower and upper boundaries of the Kumo cloud on D1, respectively).