That unwind was radically reversed this week, as the European Central Bank (ECB) surprised the markets with a hawkish twist. They suggested that the duration of reopening would be shorter than we thought. This hawkish pivot from ECB President Christine Lagarde surprised the market. The euro continued to win momentum and establish a more solid base for the EUR/USD currency pair. After Lagarde’s comments, the rate came close to breaking through the psychological level of 1.1500.
The ECB’s tempered optimism is buoyed by the calming influence of real wage growth and long-term fiscal tailwinds blowing through the Eurozone. Such an optimistic outlook raises hopes that weakness in the EUR/USD exchange rate could find a floor around the 1.13325/50 vicinity. As Euro bears are finding, it’s hard to fight the ECB’s hawkish sentiment. Most analysts expect that the ECB will be forced to cut rates once more in October. Based on today’s macro fundamentals, a stronger euro in the short-term seems likely.
The hawkish turn at the ECB has changed the market landscape. Then came the added uncertainty with the U.S. Treasury’s surprise announcement that further complicates the efforts. This announcement was EUR/USD positive and will likely affect the ECB’s future guidance. Market participants will be closely paying attention to the nonfarm payrolls (NFP) report. They’re zeroed in on the details about how very poor job growth statistics might influence the United States dollar along with the Euro.
The NFP report should be out any moment now. Analysts are anticipating it to show a weak gain of around 110,000 jobs, well below the way too high consensus of 125,000. The U.S. dollar is likely to face pressure on account of this expected weakness, if market whispers are to be believed. It might even lead to increased assessment of the Federal Reserve’s monetary policy framework. A print that dips below the important 100K level might induce further policy change calls to emerge from the Fed. This is particularly the case if it occurs in tandem with an increase in unemployment.
Should today’s NFP report reflect soft labor market conditions, it could amplify demands from lawmakers on Capitol Hill for immediate rate relief. As of now, market pricing is pointing to at least 50 basis points worth of cuts from the Federal Reserve beginning in September. Today’s labor data will be news enough to do that dramatically change those expectations. This is particularly so if the numbers are far different from what was projected.
Analysts, too, are scrupulously studying these changes. Or, at least, they should be wary of how outdated measures of U.S. labor market performance play into the ECB’s future monetary policy trajectory. A month ending on a weak jobs report would provide the catalyst EUR/USD needs to clear through key resistance. It might even aim for April’s peak of 1.1575. A much healthier U.S. employment picture might prove more supportive of dollar strength, particularly at the expense of recent euro gains.