After what was an extremely busy week of economic releases and central bank monetary policy meetings, the EUR/USD finished the week up 87 pips at $1.3116. The price action remains extremely choppy, with neither side being able to sustain any follow through for a substantial amount of time. Many analysts are now wondering whether or not the "risk on" mentality which was boosted by the better-than-expected U.S. jobs data will have any follow through going into the upcoming week and how will it influence the foreign exchange market.
Investors put on their rose colored glasses today and drove currencies and equities sharply higher on the back of stronger job growth in the month of April. At a time when other central banks like the ECB and BoJ are kick starting a new round of easing, the better-than-expected labor market report will keep the Fed comfortably on hold. The question now is whether the payroll driven rally in FX (and stocks) will last. With far less important data on the calendar next week, we think investors will remain optimistic.
She went on to add:
The resilience of the euro continues to impress us. Despite the European Central Bank's rate cut on Thursday, the European Commission's downgraded GDP forecasts and stronger than expected U.S. data, the euro traded higher against the U.S. dollar. The $1.30 level continues to provide support for the currency pair and while the euro's reaction today is the classic V shaped reversal that we have grown accustomed to seeing after non-farm payrolls, the stark contrast between eurozone and U.S. economic data along with the monetary policy bias of the ECB and Fed should have kept pressure on the euro. Nonetheless, as U.S. stocks rose to fresh record highs, the EUR/USD erased its post-NFP losses.
Other analysts believe the U.S. jobs report was impressive, particularly when breaking down the job growth by sector. Furthermore, this could be supportive of the U.S. dollar in coming sessions.
Overall this is a solid report for a couple of reasons: 1, the sectors of the economy creating jobs are heavily focused on the consumer - the largest sector in the economy, and 2, the decline in the unemployment rate was not solely down to a decline in the labor force participation rate.
She went on to add,
While 165K jobs growth is not stunning, the market is adjusting to the fact that the BLS massively under-estimated payrolls in recent months, the last two months' of revisions have been +114k. So job growth, while not a rapid pace, is at least not as bad as we thought it was this time last month. This makes the possibility of an extension of QE3 less likely, although this data does not seal the deal on a tapering of purchases either. Thus, the dollar may be in recovery mode, Treasuries are likely to rise, but gains could be capped, in our view.
So after all the economic releases, monetary policy meetings, and central bank comments on future policy, what are the charts saying? Well, the overall longer-term technical picture remains similar to what it was last week at this time. However, breaking down the charts into shorter-term time frames there are some levels worth noting.
The EUR/USD starts the week slightly higher, trading above $1.3100 after Friday U.S. employment figures up beat expectations and sent local share markets to fresh all time highs. Initial dollar gains were erased by high yielders demand, leaving the EUR/USD finally unchanged from pre-news level.
She went on to add,
The 4 hours chart maintains a negative tone, with indicators heading south below their midlines and 20 SMA capping the upside around $1.3140: renewed selling interest below $1.3100 should lead to more slides with $1.3000/40 then at sight for today.
From a longer-term technical perspective, the daily and weekly charts continue to give mixed signals. This confusing technical set up is most likely influencing market participants to get involved in other fx pairs such as the yen crosses where the trend is more clear. Furthermore, both short-term moving averages and momentum indicators (rsi) remain in neutral technical setup on the weekly EUR/USD. Until the market can break out of the rent range between $1.3250 and $1.2950, expect conditions to remain choppy.