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EUR/USD Extending Gains Going Into The Payrolls Report
- Fixed Income: Core bonds cannot build out corrective gains
- Core bonds tried to prolong their post-FOMC bounce, but the attempt ran out of steam as US traders got involved. US bonds gave back their gains, while the Bund retained modest ones. Overnight, there is renewed downward pressure, which is a bit surprising ahead of this afternoon's US payrolls. Fasten your seatbelts for this key release.
- Currencies: EUR/USD extending gains going into the payrolls report
- There was a very temporary breather in the EUR/USD rally yesterday. However, investors were clearly not prepared to take profit on the ‘reposition-trade'. EUR/USD and USD/JPY soon found the way up again. Will the payrolls provide a trigger to reconsider the current pro-euro market stance?
The Sunrise Headlines
- US Equities dropped for a second straight session on Tuesday. The S&P fell back below the 1500-level led by lower materials and energy shares. This morning, Asian shares trade mixed, while Chinese and Japanese stocks outperform.
- Overnight, the US Senate approved legislation suspending the US debt limit until the 19th of May. The final congressional approval was well expected and will now pass to President Obama for his signature.
- Chinese manufacturing surveys showed a mixed picture this morning, with the official manufacturing PMI showing a marginal slowdown in activity, while the HSBC survey of the private sector signalled a pickup in activity to a two-year high.
- Rating agency Moody's said this morning that Japan's stimulus will likely lift the economy out of a recession and the steps are a sign that the government is trying to end political inertia. The rating agency warned however that Japan's debt trajectory will continue to rise without a boost in the country's long-term growth potential.
- Rating agency Standard & Poor's affirmed the ECB's top AAA-rating citing the bank's monetary flexibility and the high average sovereign ratings among the euro zone's member states. The outlook is stable.
- Brent crude oil prices ($115.75/barrel) hovered further up on Thursday, testing the September 2012 highs around $115/barrel. Supply worries continue to support prices together with expectation that growth will pick up this year.
- Today, the eco calendar is well-filled with the US payrolls report, the euro zone (final) and UK manufacturing PMI, the US manufacturing ISM, euro zone unemployment rate and CPI inflation and final reading of U. Of Michigan consumer confidence
Currencies: EUR/USD Extending Gains Going Into The Payrolls Report
On Thursday, the global risk rally slowed temporary. However, for now this was not enough to stop the ascent of the euro. EUR/USD is even reached new ST highs well above 1.36.
Intra-day, the EUR/USD pair tested the post FOMC top on Thursday morning. However, the risk rally on the Asian and even more on the European equity markets slowed. This capped further EUR/USD gains, too. The German labour market data were much better than expected, but the market reaction was very limited. EUR/USD reached an interim low just below 1.3550 around noon, in line with the performance of the European equity markets. The early morning US data were mixed, but most important release, the jobless claims were higher/weaker than expected. There was a cautious risk-off reaction after the publication but the damage for EUR/USD was close to non-existent. The downside of the euro still proved very well protected. Most investors clearly didn't feel pressured to adjust the positions going into the today's payrolls report. The Chicago PMI was reported at a much stronger than expected 55.6 (from 50.0). At first (global) markets didn't know which card to play, but finally the easiest way for EUR/USD was still up, even as the reaction on the equity markets and the bond markets was far less clear. EUR/USD closed the session at 1.3579, compared to 1.3567 on Wednesday evening.
Overnight, sentiment on risk in Asia is basically risk-on and most currency cross rates react accordingly. EUR/USD jumped a above the 1.36 barrier and also the likes of EUR/JPY and USD/JPY are setting new highs. The Chinese manufacturing PMI's show moderate growth, but not too strong. Apparently, this is the perfect mix to keep the risk rally going. In this context, the way of the least resistance for EUR/USD is up.
Today, the calendar contains the details of the EMU manufacturing PMI's, the EMU CPI estimate and the December unemployment. Keep an eye at the PMI from the likes of Italy and Spain. The high EMU unemployment rate will also get quite some attention, but usually it is no mover for EUR/USD trading. In any case, we expect any market reaction to be guarded ahead of the key US eco data later in the session. US non-farm payrolls are expected to have grown by 165 000 and the unemployment rate is expected stable 7.8%. We put risk for a (slightly) weaker than expected report
Once gain it is not that evident to anticipate the global market reaction and the reaction of EUR/USD in such a scenario. We assume that a much stronger than expected report could be slightly supportive for the dollar. In case of a poor figure the reaction is less evident. Will the euro decline due a correction on markets of risky assets or will it be a negative for the dollar? The jury is still out be we won't be surprised to see EUR/USD ticking higher in case of a figure in line or moderately weaker than expected. In case of a really bad figure, it might provide a trigger to take some profit on the recent risk rally in general. For now, we don't preposition for a trend-reversal on the strong trend. Don't try to catch a falling knife. Even so, we fear that this market is becoming unidirectionally positioned. In such a market, one should always consider todefend trend-positions with stop-loss protection. In this respect we keep an eye at the CFTC speculative positions.
Broader context. Ongoing positive sentiment on risk continues to support the euro and the news flow from Europe (ECB talk, interest rate expectations, spread narrowing, good auctions) supports the euro, too. From a fundamental point of view, we don't see reasons for substantial additional euro gains, as it might suffocate the already very bleak growth prospects for the euro area. However, markets are clearly not ready for a cyclical rebound of the dollar. In a short-term perspective, positive financial conditions prevail as a driver for EUR/USD trading. The repayment of ECB liquidity by the banks was an additional indicator of reduced markets stress in Europe that supported the single currency. From a technical point of view, EUR/USD regained the 1.3487 level (2012 high), improving the technical picture of EUR/USD. Next short-term target comes in at 1.3868 (Nov 2011 top).On the downside, a return below the 1.3257 area (previous range bottom) would be a first indication that the rally is losing momentum. A sustained drop below the 1.3000 area (1.2998 is this year's low) would suggest that the recent rally has run its course and that more downside (or dollar strength) might be on the cards.
EUR/USD gains extended beyond the 1.3615 resistance
Support S1: 1.3570:Reaction low hourly. S2: 1.3542 Reaction low hourly +STMA S3: 1.3499 Break-up area S4: 1.3461 Reaction low hourly
Resistance R1: 1.3633/41/51: Reaction high/Previous reaction high + Daily Boll top R2: 1.3700 Big figure R3: 1.3833/68 (62% retracement off 1.4940)/previous reaction high.
The pair is in overbought territory.
On Thursday, the EUR/GBP cross rate developed a sideways trading pattern in the upper half of the 0.8500 big figure. There are no indications of a trend reversal in this cross rate, but the pair is gradually decoupling from the ongoing rally in the EUR/USD headline pair.
Intra-day, EUR/GBP was under moderate pressure in line with the overall performance of the single currency. The pair filled bids in the 0.8560 area early in the session. From there, EUR/GBP basically developed a sideways consolidation pattern. The move was in the first place technical in nature. There was little GBP related news to guide the price action. It is a bit remarkable that EUR/GBP didn't really profit from end of month buying interest that is quite often mentioned as a supportive factor for this cross rate during the last trading sessions of the month. At end of the session, cable even outperformed EUR/USD. EUR/GBP closed the session at 0.8563, slightly lower from the 0.8587 close on Wednesday evening.
This morning, the euro is again well bid across the board and this time EUR/GBP is again joining this move. The 0.8606 reaction high is coming within reach.
Later today, the UK manufacturing PMI will be published. A slight setback from 51.4 to 51.00 is expected. A positive surprise is possible. If so, it will be interesting to see whether cable can stay in lockstep with EUR/USD (or even outperform). The jury is still out, there are tentative signs that the topside in EUR/GBP is becoming more difficult.
Global context. In December, the EUR/GBP cross rate mostly copied the upward trend pattern of the headline EUR/USD pair. UK-specific eco data had only a limited impact on trading. After the January ECB meeting, the euro rallied across the board as ECB's Draghi came out with a much more positive assessment on the EMU crisis. The chances for additional ECB easing disappeared whereas they looked real after the December meeting. This triggered a global repositioning in favour of the euro. The break above the 0.8225 range top also forced us to leave our range trading strategy in the EUR/GBP cross rate. As is the case for EUR/USD, we think the euro rally is overdone from a fundamental point of view. Short-term, we cannot but acknowledge the euro positive momentum. Also in this cross rate we fear some fear of heights.
EUR/GBP: holding near the recent top
Support S1: 0.8528/13: Reaction lows S2: 0.8473/41: MTMA/Previous reaction high
Resistance R1: 0.8606: Reaction high R2::0.8665/80 Previous reaction high/Boll top
The pair is in overbought conditions
US: jobless claims edge up to pre-holiday levels
In the week ending the 26th of January, US initial jobless claims edged up sharply from multi-year lows. In the week ending the 26th of January, initial claims rose by 38 000, from 330 000 to 368 000. The consensus was looking for a more limited increase to 350 000. The less volatile four-week moving average rose from 351 750 to 352 000. The Labour Department added that swings in jobless claims may reflect challenges the agency has adjusting the data during the holiday period at the start of quarters. In the previous weeks, it was clear that the claims were depressed due to seasonal factors at the start of the year. We believe that the claims are now again at more reliable levels, which we saw ahead of the holidays. In the coming weeks, we hope to receive more clarity. Continuing claims, which are reported with an extra week lag, rose by 22 000, to 3 197 000.
Contrary to most other regional business confidence indicators, the Chicago PMI picked up in January, to reach its highest level since April 2012. The Chicago PMI rose from 50.0 to 55.6, while a marginal increase was expected. Also the details are encouraging as production (60.9 from 52.4), new orders (58.2 from 50.4), employment (58.0 from 46.8) and inventories (55.0 from 48.7) improved significantly. Orders backlog picked up from 45.1 to 46.6, while supplier deliveries dropped from 52.8 to 49.9. Almost all regional business confidence indicators showed a significant worsening in sentiment in January. The Chicago PMI is an exception to this rule, showing signs of a significant improvement. For today's manufacturing ISM, signals are now a little bit more mixed, although we continue to see downside risks.
EMU: German unemployment drops unexpectedly
According to seasonally adjusted data, German unemployment dropped unexpectedly in January, for a second straight month. The number of people unemployed fell by 16 000 to a total number of 2.916 million, while an increase by 8 000 was expected. The December figure was revised lower too, showing a drop by 2 000, while an increase by 3 000 was previously reported. As a result, the unemployment rate dropped from 6.9% to 6.8% in January, while a stabilization was expected. The German unemployment rate is now again at its record low, after a temporary uptick at the end of 2012. The number of vacancies nevertheless dropped slightly from 453 000 to 452 000 in January. Although the German economy probably contracted in the final quarter of 2012, the labour market remained strong, showing a drop in the number of people unemployed in both December and January. The record low unemployment rate should support consumption this year, helping to keep the economy out of contraction. Nevertheless, the warm winter weather probably supported employment. As weather was very cold in the second half of January, unemployment might increase somewhat in February