The Euro rallies underpinned by NFP and ECB plan. Friday's employment report showed the US economy added fewer jobs than expected in August, fueling prospects the Federal Reserve may need to embark in another round of quantitative easing(QE3) to boost the sluggish economy.
Nonfarm payrolls just came out with 96K more jobs in August when expectations were 125K new payrolls. Unemployment report was down from 8.3% in July to 8.1% in August but this decline was drove by the "drop in the participation rate to 63.5% with the Workforce shrinks by 368K," commented Mauricio Carrillo from FXstreet.com in his Twitter account. Carrillo also commented that it was true that "NFP was weak at +96K and unemployment just fell on participation rate drop, BUT it's still growth; and a data that Europeans would dream!"
But the Euro is knocking 1.2800 doors as investors cheer up Draghi's plan and QE3 hopes. Kathy Lien, from BK Asset Management, puts "the odds of QE3 at 75% next week." With ECB and NFP key data behind us with bug movements, the Next week seems to be another party. Friday's "volatility is a taste of what may be come in the new trading week, which is jammed packed with more market moving events," commented Kathy Lien.
"If the Fed adds to the stimulus provided by the ECB and the Chinese government," Lien points, "we could see a sustained improvement in risk appetite."
Changing sentiment; The week ahead
Then, now the "Ball in Fed's Court" as UBS' analysts Geoffrey Yu and Eamon Aghdasi commented in their "The Week Ahead in FX" report. UBS now looks "for the Fed to provide additional stimulus to
the economy at their upcoming FOMC meeting, through outright purchases of MBS or Treasurys."
But HSBC expects "further QE to be USD negative, partly because more easing will induce a ‘risk-on’ move." Richard Franulovich from Westpac believes that "today’s weak August payrolls data has cemented the case for FOMC action as soon as next week."
"The atmospherics around the USD have turned aggressively," commented Westpac's analyst. "USD long positions have been cut sharply in recent weeks but the case for a sustainable rally is weak against the backdrop of easier Fed policy steps by the ECB to address tail risks."
"The USD index could easily re-test the 2012 lows at 78.095 in coming weeks," Franulovich adds, "making for a further 2.6% downside. That would put EUR/USD near 1.31 with stretch targets of 1.33-1.34."
"The ECB-US payrolls double boost for the euro has pushed the currency to test and tentatively break above its June highs", states the Wells Fargo team. "While the speed of the recent euro rally does suggest scope for some near-term technical consolidation, we are comfortable maintaining a near-term target for at least a further 1.5%-2% gain in the euro".
"Acknowledging that September Fed easing is not yet a 'done deal' and, more importantly, the fact there is still significant European event risk in the weeks ahead, we believe the latest developments could be the trigger for a more sustained rally in global market sentiment and a period of renewed US dollar weakness", Wells Fargo comments.
"Risk currencies performed extremely well thanks to the disappointing U.S. non-farm payrolls number and monetary support from the ECB," commented Lien. The BK Most major currency pairs have broken out of their recent ranges and as long as the German Constitutional Court approves the rescue fund and the Federal Reserve eases, the rallies could continue.
According to Goldman Sachs analysts, Spain should submit a request for EU bailout as soon as Sept 13-14 at Eurogroup. And this is a risk event as "Spanish PM Rajoy might be tempted to 'go it alone', pushing back against an ESM loan/credit line, keeping the new 'Outright Monetary Transactions' programme at bay," affirms Wespac analyst.
Another key events for the market are central banks and China data, "RBNZ is also expected to hold, while the SNB should reiterate its stance on defending the 1.20 support for EURCHF. Germany announces it’s much anticipated constitutional court ruling on Wednesday along with general elections in Netherlands." But "Risks around the German Constitutional Court next week are exaggerated," comments Franulovich. "They should find German participation in the ESM is constitutional, albeit with some restrictions."
In the same line "Dutch election risks next week have been hyped as well but recent polls show a tilt back toward pro-European parties," adds the Westpac analyst. Thus combining "these events could fuel another leg lower in the USD."
Finally, it was "an impressive end to an impressive week," as well said Jamie Coleman from Forexlive.com while commenting the Euro conquering the 1.2800 level. "There is some wood to chop on up to the 1.2840 area, so a break higher early next week would be very impressive indeed. My guess is that we get some backing and filling between 1.2700 and 1.2825/40 early next week until the major event risks out of Europe are out of the way Tuesday. After that, we have the Fed to contend with on Thursday."
Check the FXstreet.com experts, banks and brokers forecast poll: Bearish, Bearish & Bearish sentiment in EUR/USD