The euro skyrocketed yesterday and continued to gain during the Asian session today, outperforming all the other major currencies. The reason was the hawkish turn by the ECB, which opened the door for a rate hike this year.
Ahead of the ECB, we had a BoE decision, with British policymakers deciding to hike by 25 bps. The surprise was not the hike but that 4 of the 9 members voted for a 50 bps increase. As for today, the main event may be the US employment report for January, which could reshape market expectations on the Fed’s future course of action.
ECB President Lagarde Turns Hawkish, BoE Hikes, US Jobs Data in Focus
The US dollar continued to trade lower against most of the other major currencies on Thursday and during the Asian session Friday. It gained only versus JPY, while it was found virtually unchanged against CHF and CAD. The leading gainers were EUR and NZD, with the former nearly doubling the rally of the latter.
Yesterday, it was a euro day, with the common currency rallying around 200 pips after the ECB decision. The bank decided to keep all its monetary policy tools untouched as was widely expected, while the statement accompanying the decision was very little changed from the previous one.
At the press conference, ECB President Christine Lagarde decided to light fireworks. She said that inflation remained elevated for longer than previously thought. At the same time, the economy was hurt less than anticipated by the pandemic, adding that the March and June meetings will be essential for evaluating their guidance.
In our view, this was a strong hawkish shift by Lagarde, with the main message being that they could, after all, decide to lift rates in 2022. Remember that prior remarks by her and several of her colleagues were highlighting the case of no liftoffs this year.
Now, that door is open, and we may get more hints and clues at the March and June gatherings. Euro-traders may have increased bets over a potential hike by December, and for now, they could continue to do so if data warrant so.
Therefore, with such a decisive shift in the ECB’s language, we will also switch our stance, and we would expect the euro to continue gaining for a while more, at least until data and headlines point otherwise.
Besides the ECB, we also had a BoE monetary policy decision beforehand. In contrast with the ECB, this bank decided to lift interest rates, and actually, for the second time since the pandemic. Specifically, officials decided to hike by 25 bps, to 0.50%, via a 5-4 vote, and what’s impressive is that the 4 dissenters called for a 50 bps hike.
The pound strengthened at the time of the announcement, but it was quick to give back those gains, perhaps as a 25 bps hike was already fully priced in by the markets.
Moving ahead, we believe that the pound’s performance may depend on upcoming economic data, as only one member needs to be convinced by strong numbers to join the camp supporting a double hike at the upcoming gathering.
However, for now, at least against the euro, we see the case for the pound to underperform, as the hawkish shift by the ECB resulted in a bigger surprise to market participants. What’s more, from a technical standpoint, the EUR/GBP pair broke above the downside resistance line drawn from the high of Dec. 8, which may have been interpreted as a reversal signal.
As for today, the big event is likely to be the US employment report for January. Nonfarm payrolls are expected to have slowed to 150k from 199k, while the unemployment rate is forecast to have stayed unchanged at 3.9%.
Average hourly earnings are expected to have slowed to +0.5% MoM from +0.6% MoM, but barring any major deviations to the prior monthly prints, this would take the YoY rate up to +5.2% from 4.7%, which could add to expectations of further acceleration in US inflation for the months to come.
In our view, the forecasts point to another decent report, despite a potential slowdown in the NFPs, which could add credence to the Fed’s view of a March rate hike, and some more during the rest of the year. Remember that the December “dot plot” pointed to three quarter-point liftoffs for 2022, but investors are convinced that the Committee will proceed with nearly five according to the Fed funds futures.
Thus, if the forecasts are met, or even better exceeded, market participants may become more confident about their view and perhaps buy dollars again.
EUR/GBP – Technical Outlook
EUR/GBP traded lower after the BoE decision but hit support slightly above 0.8280. Following remarks by ECB President Lagarde at the press conference following the decision of her bank, it skyrocketed to break above the 0.8630 barrier, marked by the high of Feb. 1, but also above the downside resistance line drawn from the high of Dec. 8. In our view, this has signaled a short-term trend reversal.
At the time of writing, the rate is trading slightly above the 0.8422 barrier, marked by the peak of Jan. 24, and we would expect the bulls to continue driving north, perhaps aiming for the 0.8456 territory, marked by the peak of Dec. 27. If they don’t stop there, we may experience extensions towards the 0.8480 or 0.8500 zones, defined as resistances by the inside swing low of Dec. 22 and the high of the day after, respectively.
To start examining the resumption of the prior downtrend, we would like to see an apparent dip back below 0.8340, marked by the inside swing high of Feb. 3. This may confirm the rate’s return below the downside line drawn at the peak of Dec. 8 and may initially allow declines towards the 0.8323 level, marked by the low of Feb. 2, or the 0.8305 barrier, marked by the lows of Jan. 28 and 31.
If neither obstacle can stop the slide, we would see another round of declines towards the 0.8280 barrier, marked by the low of Feb. 18, 2020.
USD/JPY – Technical Outlook
USD/JPY has been in recovery mode since Wednesday, when it hit support at 114.15. The move confirmed a forthcoming higher low on the daily chart, but it is still far from a higher high. Therefore, we prefer to adopt a flat stance for now. Maybe the US employment report could make the outlook a bit clearer.
Currently, USD/JPY is trading slightly below the 115.15 barrier, the break of which could invite more bulls into the game, who could push the action towards the 115.68 zone, marked by the peak of Jan. 28. If they are unwilling to stop there, a break higher could see scope for extensions towards the highs of Jan. 6 and 4, at 116.18 and 116.34, respectively.
On the downside, a break below 114.55 could mean that the bulls are out of the game and may initially result in declines towards Wednesday’s low of 114.15. Another break, below 114.15, would confirm a forthcoming lower low and may see scope for a more significant fall, perhaps towards the 113.47 zone, defined as support by the lows of Jan. 14 and 24.
As for the Rest of Today’s Events
At the same time, with the US employment report, we get jobs data for January from Canada. The unemployment rate is forecast to have risen to 6.2% from 5.9%, while the employment change is anticipated to show that the Canadian economy has lost 117.5k jobs after adding 54.7k in December.
A weak report could hurt the Canadian dollar, but not much in our view, as last week, the BoC provided strong signals about a rate hike in March, and we don’t believe that these numbers could change that.