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Will Non-Farm Payrolls Drive EUR/USD to 1.22?

The worst performing currency today was the euro, which unwound two days worth of gains versus the U.S. dollar on the back of the European Central Bank's monetary policy announcement. As we suspected, this was the most market moving rate decision of the week but the U-turn caught some traders by surprise after the ECB dropped the line in their policy statement that talked about the possibility of increasing the asset purchase program if the outlook becomes less favorable. This initial tweak took EUR/USD within a few pips of 1.2450 but ultimately, it was ECB President Draghi's comments that had a lasting impact on the currency. In contrast to the positive tone of the ECB statement, the central bank head emphasized the need for policy accommodation, the downside risks related to global factors, the strong euro and protectionist threats. The central bank also lowered their 2019 inflation forecast with Draghi warning that underlying inflation remains subdued, "victory hasn't been declared" and therefore "ECB policy will continue to be reactive." The dovish tone of his speech was all investors needed to hear to send EUR/USD tumbling towards 1.23. If Friday's non-farm payrolls report satisfies dollar bulls, we could see EUR/USD hit 1.22.

President Trump officially unveiled the steel and aluminum tariffs that will take in effect in 15 days. Its not clear how binding the levels are as Canada and Mexico are exempt for now but tariffs may need to be increased on other nations. Lighthizer has also been appointed to lead talks on lifting tariffs with other nations - which means its a messy ambiguous announcement that creates more confusion than clarity. Meanwhile tomorrow'sU.S. non-farm payrolls report is the last big event risk of the week. The U.S. dollar is trading higher ahead of the release and if the labor data is strong enough, it could take EUR/USD towards 1.22 and USD/JPY to 107.00. Even if the data is weaker than expected, we don't expect a significant sell off in the U.S. dollar because the outcome of the jobs report won't change the Federal Reserve's plans to raise interest rates later this month. The market is pricing in 100% chance of a hike and unless wage growth is flat and non-farm payrolls is 50K or less, there's no reason to believe they will pass on tightening. All but one of the leading indicators for non-farm payrolls that we follow tell us that labor market conditions strengthened in February. Unfortunately that one release - the employment component of non-manufacturing ISM is our favorite guide for NFPs. According to that report, the service sector added jobs at the slowest pace in at least 6 months so job growth could miss but we view a bounce in EUR/USD as an opportunity to sell at higher levels. Economists are looking for a decent amount of job growth, a lower unemployment rate and marginal easing in average hourly earnings.

If job growth exceeds 150K, the unemployment rate improves and average hourly earnings growth slows no more than 0.2%, EUR/USD should fall to 1.2250. If earnings growth stabilizes at 0.3% or improves, EUR/USD will hit 1.22. However if job growth falls short of expectations, the unemployment rate fails to improve and/or wage growth slows to 0.1%, the best pair to sell would be USD/JPY for a move back to 105.50. In that scenario, EUR/USD could bounce back up to 1.2375.

Arguments in Favor of Stronger Payrolls

  1. ADP reports steady payroll growth at 235K vs. 234K previous month
  2. 4 Week Average Jobless Claims Drops to 222.5K
  3. Continuing Claims at lowest level in 16 weeks
  4. University of Michigan Consumer Sentiment Index Rises to 99.7 from 95.7
  5. Conference Board's Consumer Sentiment Index at Highest Level in 17 Years
  6. Challenger Reports 4.3% reduction in job cuts
  7. Rise in Employment Component of Manufacturing ISM                                  

Arguments in Favor of Weaker Payrolls

  1. Employment Component of Non-Manufacturing ISM at weakest level in at least 6 months

The Bank of Japan also meets tonight and while they may not be ready to exit their easy policy in 2019, recent improvements in Japanese data suggest that the tone will be yen positive. The sell-off in euro carried over to GBP/USD, which sapped a 5-day rally to trade just above 1.38. With no UK data released on Thursday, the move was driven entirely by U.S. dollar strength, risk aversion and a lack of interest in European currencies.   While the trade balance and industrial production reports are scheduled for release on Friday, the market's appetite for euros and the outcome of the NFP report should have a greater impact on sterling trade.

All 3 of the commodity currencies traded lower against the greenback but the Canadian dollar received a lift from President Trump's exemption of Canada and Mexico from the tariffs for now. Canadian labor market numbers are scheduled for release on Friday and a rebound in job growth is expected after last month's sharp fall. The Australian and New Zealand dollars were also hit by U.S. dollar strength. No major economic reports were released from New Zealand but AUD shrugged off stronger Australian and Chinese trade data. Australia turned a surplus according to the latest report and Chinese exports surged 36%. While Chinese New Year demand and yuan weakness affected the data, underlying demand is strong.

Author

Kathy Lien

Kathy Lien

BKTraders and Prop Traders Edge

Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies.

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