Labor market data leaves the Fed with no choice

[Ben Graham]

The latest U.S. employment report is direct evidence that the Federal Reserve has no option but to return to a looser monetary policy. A few years ago, unemployment was at a half-century low. Now, this troubling rate has reached its highest level since 2021, recorded at the height of the pandemic.

According to the Bureau of Labor Statistics, the U.S. unemployment rate of 4.3% raises concerns that the labor market—hit both by uncertainty and by rising costs associated with Trump's trade war—is on the brink of a more significant downturn.

These 4.3% are not just numbers in a report. They represent a complex picture of interconnected economic forces steadily eroding the foundation of American employment. The trade war unleashed by the Trump administration acted as a catalyst, triggering a chain reaction. Higher tariffs and trade barriers not only drove up production costs for U.S. companies but also created an atmosphere of instability, discouraging businesses from expanding and hiring new workers.

Uncertainty has become the main enemy of the labor market. Entrepreneurs, unsure of what to expect tomorrow, are delaying major investments and strategically downsizing staff in preparation for a potential economic storm. This effect is especially visible in industries directly dependent on international trade, such as manufacturing, agriculture, and logistics.

Rising costs from the trade wars are pressuring small and medium-sized businesses, the backbone of U.S. job creation. Many firms are unable to withstand the increased financial burden and are forced to cut jobs to stay afloat. This, in turn, reduces consumer demand and further slows economic growth.

The data also confirm last month's employment report, which showed a shockingly weaker hiring environment than previously expected. Job growth has slowed significantly in recent months, vacancies have declined, and wage growth has decelerated—all weighing negatively on overall economic activity.

Markets appear to believe Friday's report radically changes the outlook. In reality, this is exactly what policymakers expected. Typically, such bad news for American workers has a silver lining for Wall Street, as it increases the likelihood of a Federal Reserve rate cut. More borrowing, more growth, higher stock prices, and a weaker dollar.

As you can see in the market, currency traders wasted no time continuing to sell off dollar assets.

As for the current technical picture of EUR/USD, buyers now need to break above 1.1740. Only this will open the way toward testing 1.1781. From there, a climb to 1.1825 is possible, though achieving this without support from large players will be quite difficult. The ultimate target is the 1.1875 high. In case of a decline, I expect serious buying interest only around 1.1705. If no buyers appear there, it would be preferable to wait for a test of the 1.1660 low or to open long positions from 1.1630.

As for the current technical picture of GBP/USD, pound buyers need to overcome the nearest resistance at 1.3520. Only this will allow targeting 1.3550, above which breaking higher will be difficult. The ultimate target is the 1.3590 level. In case of a decline, the bears will attempt to regain control around 1.3485. If successful, a break of this range would deal a serious blow to the bulls and push GBP/USD down toward 1.3450, with prospects of reaching 1.3415.

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