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The US vs. Europe
- In Europe: PMI data was revised higher for Italy, Spain and Germany, which helped push up the overall Eurozone manufacturing PMI to its highest level since Feb 2012.
- The unemployment rate for December was also revised lower to 11.7% - still extremely high, but not a fresh record high. This could have been impacted by the shock drop in unemployment in Germany last month.
CPI also moderated to 2% from 2.2% in Dec, which may help boost consumption later this year.
- In the US payrolls were roughly in line at 157k, vs. 165k expected. The unemployment rate edged up to 7.9% from 7.8%, and hourly earnings were a touch higher than expected.
- Revisions to the December and November numbers added an extra 127,000 jobs to the US economy. This ended up begin the big news from the payrolls report, and not the slight rise in the unemployment rate.
- Confidence and the ISM manufacturing data both picked up strongly
Overall, this data is policy neutral for the ECB and the Fed. The Fed is likely to keep buying $85bn of Treasury and mortgage backed debt each month until the unemployment rate drops to at least below 7% and the ECB is unlikely to add more stimulus to the economy if there are signs of a strengthening economy.
We believe that the European data is slightly more significant from a currency perspective, especially since the ECB meets next week. The market was braced for a fresh record high in unemployment in the currency bloc, so drop in the rate back to 11.7% was a large positive surprise. Added to that, the drop in inflation wasn't expected, and there were lots of upward revisions to member states' PMI data for Jan. The bar is undoubtedly lower for Europe than it is for the US; hence it is slightly easier for Europe to “impress” the market.
It's worth putting this European data in perspective: PMI's are still in contractionary territory and unemployment remains at extremely high levels in the periphery. However, it suggests that growth is stabilising, which sets the stage for a rebound later this year. The biggest risk to Europe has shifted from the periphery to France, and we will be watching French data very closely in the coming weeks and months.
The euro came under some selling pressure post the payrolls data, although this seems to be down to an adjustment in the yen, which pushed EURJPY below 126.00 at one stage, rather than any shift in sentiment towards the euro. Investors have been picking up the euro on dips, which is making pullbacks fairly shallow, suggesting that the bulls have the upper hand for now. Key support zones lie at 1.3580 then 1.3515. Near term resistance levels lie at 1.3680 then at 1.3715. In the medium-term we look for a move back to 1.38 – the high from October 2011 – on increasing signs of stabilisation in Europe's periphery.
EURUSD: Hourly chart - dips remain shallow