Will Nonfarm Payrolls Drive EUR/USD To 1.22?

Will Nonfarm Payrolls Drive EUR/USD To 1.22?

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Thursday’s worst-performing currency was the , which unwound two day’s worth of gains versus the U.S. dollar on the back of the European Central Bank’s . 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 its 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, a strong euro and protectionist threats. The central bank also lowered its 2019 inflation forecast with Draghi warning that underlying inflation remains subdued, saying: “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 toward 1.23. If Friday’s report satisfies 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
. It’s 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 it’s a messy, ambiguous announcement that creates more confusion than clarity. Meanwhile, Friday’s U.S. report is the last big event risk of the week. The is trading higher ahead of the release and if the labor data is strong enough, it could take toward 1.22 and 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 later this month. The market is a 100% chance of a hike and unless wage growth is flat and Nonfarm Payrolls is 50K or less, there’s no reason to believe the Fed will pass on tightening. All but one of the leading indicators for Nonfarm Payrolls that we follow tell us that labor-market conditions strengthened in February. Unfortunately that one release – the 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 and marginal easing in .

If exceeds 150K, the improves and growth slows no more than 0.2%, 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 for a move back to 105.50. In that scenario, EUR/USD could bounce back up to 1.2375.

Arguments For Stronger Payrolls

  1. ADP reports steady at 235K vs. 234K previous month
  2. 4-Week Average Drops to 222.5K
  3. at lowest level in 16 weeks
  4. University of Michigan Index Rises to 99.7 from 95.7
  5. Conference Board’s Index at Highest Level in 17 Years
  6. Challenger Reports 4.3% reduction in
  7. Rise in of Manufacturing ISM

Arguments For Weaker Payrolls

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

The Bank of Japan was due to meet and while it may not be ready to exit its easy policy in 2019, recent improvements in Japanese data suggest that the tone will be positive. The sell-off in carried over to , 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 strength, risk aversion and a lack of interest in European currencies. While the and reports are scheduled for release on Friday, the market’s appetite for euros and the outcome of the should have a greater impact on sterling trade.

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

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