The euro held steady near a six-week high against the yen and hugged tight ranges against the dollar on Friday ahead of a closely-watched U.S. payrolls report which could shed light on the interest rate outlook.
The fact that the euro failed to break higher despite Trichet indicating an October rate hike and
suggesting a ‘progressive withdrawal of monetary accommodation’ suggesting even more rate hikes
ahead suggests that there is lack of direction.
Nervousness ahead of the US August labour market report might play in. The inline with expectations release of the Chicago PMI (57.1) showed a sharp rise in its employment sub-index and the Monster report illustrated an improved labour market for August. While these two fragments of information do not necessarily suggest a strong NFP report today it will be enough to prevent the euro developing gains ahead of US data releases, BNP Paribas noted.
Most US activity data were weak and US bond yields continued to decline yesterday with 10-year Treasury bonds now trading at 4.74%, having declined by 50bps from the top. The cautiousness of EUR/USD to trade higher seems to be at odds with the continued decline of bond yields and one of the two will have to give in.
The consensus expects NFP at 125k and we have little reason to divert significantly from the consensus estimate, leaving us to discuss the market impact if incoming data surprise to one side or the other. US data weakness has been the dominant theme over recent weeks. Accordingly, a stronger payroll report would have the stronger surprise element, while a weak payroll report would fit within the trend of weak data releases suggesting in the short-term only a muted market impact. To cut a long story short: EUR/USD faces an asymmetric market situation where short-term downside risks overwhelm. EUR/USD’s key support at 1.2780 must be watched. In the case of declining below this level 1.2700 will be tested. A cable break below the 1.9000 level would take price action below the July uptrend.
Cable also remains well bid against the Japanese yen, last at 223.58 and the Swiss franc, last at 2.3440, with more gains possible if the dollar bounces higher.
