ECB meeting and US Payrolls: the imbalance battle begins

I found myself drawing Fibonacci retracements and trend lines in my EUR/USD chart earlier today, looking for what was not actually there: a trend. To the already existent drop in market’s volatility, these last few days extreme cautious was added amid ECB meeting and US Nonfarm payrolls release. Both events are the main ones for each currency, as they are the barometer of their economic health, and therefore will help determinate where the most traded pair will go this month.

Limbo

The currency market has been paralyzed ahead of these events, but is not just a matter of days: the extreme cold winter in the north hemisphere may have been a good excuse for the stubborn, slow economic recovery; but the fact is that Europe and the US face the same problems: the job markets are still tough and deflationary risks are high. And the worse thing is that none of them can be solved anytime soon.

On the monetary side, while the Federal Reserve is gradually reducing its capital injections and chief Janet Yellen suggested past month that rates can even start rising in about 6 months when tapering is completed, the ECB is discussing whether or not to start applying facilities, and rumors sound again loud on a possible rate cut for this month.

So what’s next now that spring arrived? Is there any chance to see economies picking up, and therefore trends? Let’s take a look at each event and the possible outcomes on different scenarios:

ECB economic policy meeting

The European Central Bank does not has it easy this time, after inflation dropped to 0.5% yearly basis on its latest reading, well below the 2% ideal target. But the ECB has not only to deal with the deflationary risk but with the rising euro to dollar exchange rate, which results in further pressure over the economic recovery. 

In this scenario, some action seems to be inevitable despite most economist expect the bank to remain on hold; the most accurate tools to temper the currency strength would be a deposits rate cut, or even a levy on banks overnight deposits at the ECB, although starting some sort of QE by printing money is not completely out of the question. The EUR may fall particularly with a surprise cut of deposits rates, and if the US employment readings surprise to the upside, the EUR/USD trend may finally quick start… to the downside.  On the other hand if the bank remains on hold, a test of the 1.4000 figure seems more likely, particularly if Friday’s NFP release disappoints.

US Nonfarm Payrolls

Lately US data has been far from a joy and when it comes to employment figures, disappointing for the most; the FED has been quite clear putting the blame on the polar wave for the delay in the employment, and after the hawkish tone of last meeting, Mrs. Yellen shook markets saying that the US may need stimulus for “some time” still. Stocks recovered the bullish tone mildly lost over the first months of the year, and trade near fresh all time highs in hopes the liquidity injections may not continue to be so easily removed.

In the meantime, participation rate is near record lows and many workers have only part time jobs, while latest monthly figures had lost the shine of 2013. But if this upcoming March reading results to surprise to the upside, the reading will be interpreted in relation with next FED moves: a job creation of anything above the expected 196K should confirm the Central Bank will continue tapering regardless participation rate or part time jobs, giving dollar a boost against its rivals particularly against JPY.

Greenback strength against European rivals will depend on ECB outcome on Thursday, as if the EUR rises on Thursday beyond 1.3850, dollar gains will likely remain subdue and short lived. If on the other hand, the ECB eases and the week ends with a strong US employment figure the future of the EUR/USD will likely be closer to 1.35 than 1.40.