After the Fed’s decision to start tapering of its asset purchases in January 2014, the U.S. dollar could increase its value against other major currencies.  The study of cycles appears to anticipate the unemployment rate bottoming in 2014 or 2015 at the latest.

US economy: Optimism is prevailing

After a few months of rumors, Mr. Bernanke announced last week that the Federal Reserve will begin slowing down its bond purchasing. Starting in January 2014, it will release USD 10 billion at each meeting with the option of passing one month if the economy will not perform accordingly to expectations. Mr. Bernanke sees the risks of Fed anticipations as balanced and seems to be confident about job creation in the United States, despite job expansion being mainly based on manufacturing and construction. In November, 203,000 new positions were created on the top of October’s 200,000. The participation rate rose slightly to 63% from 62.8%, and the unemployment rate is now at 7.0%, the lowest level in five years. Nevertheless, other numbers are not so positive. Service sector employment, for example, fell from 183,000 to 152,000 in November. Hourly wage growth is unchanged at 2.0%, and the average hours worked has been stagnant since the end of 2010.

US dollar: Will it increase in January?

In effect, the study of cycles seems to anticipate that unemployment will bottom sometime in 2014 and then will rise again for the final third wave. Let us see how. Since 1948, the unemployment rate had two bullish cycles (1952/61, 1969/1982). Movements lasted for 9/13 years and extended 63%/67% top/bottom. They all climbed in three distinct waves before collapsing. Declines prior to the final wave lasted for 4 (1975–1979) and 2 (1958–1960) years before prices rose for the final peak. The last waves stretched for 38% and 33%, respectively, and lasted 1 year (1960–1961) and 3 years (1979–1982) from the bottom. How would it fit in today’s scenario? Unemployment began in 2000. It topped in 2003, bottomed in 2007, and completed the second wave in 2009. The movement extended 60% top/bottom. As a result, a third and final wave is still missing.

The Fed expects inflation to increase again, as rates are seen moving higher. Nonetheless, rising interest rates would slow down the housing recovery, despite the inventory of unsold homes lately hitting new lows. Manufacturing is the other good news for the US economy. Production rose from 0.3% in September to 3.6% in November. On the other hand, retail sales climbed 0.7% month-on-month in November, and core retail sales are up 4.70% annualized from 4.0% in July. The US dollar should benefit from the Fed’s decision to taper its bond-purchasing program. The EUR/USD could fall to 1.3550/1.3450 over the coming months.