Will payrolls give directional guidance for USD?

KBC Market Research Desk KBC Bank

EUR/USD reversed most of Wednesday’s gain yesterday. The risk rally took a breather. German factory orders again declined sharply. EUR/USD started a gradual intraday slide. Later, jobless claims printed strong/low (202K), confirming a healthy labour market. US yields reversed an earlier dip. The combination of euro softness and a USD bid pushed EUR/USD to the low 1.12 area. The pair closed at 1.1221. USD/JPY stayed well bid and finished at 111.66. Overnight, Asian equities mostly show modest gains as US and China officials confirmed progress on the trade talks. At least for now there is no euphoria. USD/JPY (111.70 area) profits slightly from the tentative risk-on. At the same time, EUR/USD also gains marginally (1.1225 area).
This morning, German production data might guide euro trading at the start of the session. However, the focus for global FX trading will be on the US payrolls. Late last week, markets were dominated by some kind of growth panic. This panic eased this week. In this context, a material deviation from consensus is probably needed for the payrolls to trigger an outspoken USD move. With the USD close to meaningful resistance levels (EUR/USD 1.12 support) , the USD reaction function might be slightly asymmetrical with the dollar a bit more sensitive to a negative surprise than to a positive one.
Early this week, EUR/USD came close to the 1.1177/87 support, but a real test/break didn’t occur. The jury is still out, but this week’s price action suggests this support won’t give away that easily. For that to happen, unexpected additional negative EMU news or surprisingly strong US data are probably needed. Recent data evidence doesn’t support this scenario. A constructive risk sentiment/positive headlines on trade might be a euro supportive too. We keep the view that a sustained EUR/USD decline will not be that evident as we don’t expect the Fed to leave its wait-and-see bias anytime soon.

EUR/GBP hovered in the 0.85 big figure yesterday as investors await more news from the talks between officals of PM May’s party and the Labour opposition to try to find a way out of the Brexit impasse. This morning, EU’s Tusk was said to offer the UK a 12-month Brexit delay. Sterling is gaining modest ground. A long delay evidently avoids a hard Brexit, but probably won’t solve the political stalemate in the UK. We expect more technical trading in the EUR/GBP 0.85 big figure as the negotiations will most likely continue into the weekend.

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KBC Market Research Desk

KBC Bank

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