The combination of lower unemployment and better wage data sent EUR/USD slightly lower on the announcement, as it supports the Fed's case for announcing 'quantitative tightening' (shrinking the balance sheet) in September and raising rates again in December.
However, we still think the jobs report underpins the Fed's dilemma: unemployment and (wage) inflation are low at the same time. The reason why the Fed continues hiking is Janet Yellen and co's strong belief in the Phillips curve. The tight labour market should be sufficient to push wage growth and inflation higher eventually.
In our view, the problem is that the tightness of the labour market is not the only factor determining wage growth, as second-round effects following many years with low inflation have hit wage growth.
EUR/USD fell slightly on the NFP announcement. However, the very modest price action shows the market's eagerness to buy EUR/USD. In our view, we could see a push towards 1.20 over the coming one to two weeks, as momentum is very strong.
We forecast EUR/USD at 1.22 in 12M.
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