Alpesh Patel's NEWSLETTERPRO – ECB delivered a killing blow to the Euro while today’s Non-Farm Payrolls report is open for surprise on either side

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MORNING BRIEF

© Alpesh Patel

Market participants were caught by surprise yesterday by ECB’s decision to lower interest rates to 0.25% in an effort to spur consumer spending in the Euro-zone. Almost nobody was prepared for this event and this is obvious from the way the Euro reacted to the announcement. The Single currency fell off a cliff from 1.35 to 1.3300 in a matter of 2 hours as there was no demand for the European currency to reduce its descent. ECB President Mario Draghi said that yesterday’s move was made to tackle the low inflation in the region but analysts are concerned about the possibility that low inflation could turn to deflation as Producer and Consumer Prices are at yearly lows. Adding insult to the injury, the US Q3 GDP came far better than expected at 2.8% versus the 2.0% eyed showing that growth in the US is still strong and tapering might not be that far down the road as everyone thinks. Today’s Non-Farm Payrolls report could offer some more insight on the labor market conditions in the US and investors are braced for a low printing due to the recent US government shutdown. Expectations are that the US economy could have added something between 50k to 175k jobs and this wide range of estimates offers no consensus on  what to expect. Recent job data as the ADP employment, the employment component of the ISM Non-Manufacturing Index and such are mixed thus there’s potential for a surprise on both sides.

Non-Farm Payrolls report could make or break the Dollar

Today’s focus is unavoidably on the NFP report scheduled for release at 13.30 today. Earlier in the day, the German and British Trade Balance will offer some valuable data on how the two countries’ exports are fairing but after yesterday’s rate cut nobody will pay much attention to these releases. The Non-Farm Payrolls report is the event of the day and given the fact that the government shutdown in the US makes difficult for analysts to come up with an accurate prediction, there’s room for a surprise on both sides. Optimistic assessments talk for as many as 175k jobs added while the most pessimistic figure eyed is 75k jobs.  We think that if the announcement surprises to the upside this could give a massive lift to the Dollar and bring forth discussions about tapering even within 2013.

Economic Calendar

Time

Currency

Event

Importance

Forecast

Previous

07.00

EUR

German Trade Balance

Medium

15.4B

9.4B

09.30

GBP

Total Trade Balance

Medium

-2700P

-3320P

13.30

USD

Change in Non-Farm Payrolls

High

125K

148K

13.30

USD

Unemployment Rate

High

7.3%

7.2%

14.55

USD

U. of Michigan Confidence

High

74.5

73.2

 

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TECHNICAL ANALYSIS & LEVELS

EUR/USD

The Euro yesterday punished us by hitting our stops at the 1.3480 price tag after the surprise rate cut by the ECB. We were caught by surprise like the rest of the market as we believe that a rate cut at this time was not justified by the data and wouldn’t do any good to the currency rate. Bottom line, our view is that the decision yesterday might have been a political one as someone didn’t like Euro at such highs. For today, we would prefer to stand aside from the Single currency as the pair is still oversold and with the NFP report open to a surprise on both sides we wouldn’t want to gamble on the outcome. The levels we need to watch to determine the pair’s outlook are the 1.3460 that acts as a short-term resistance and the 1.3320 which is our floor for now. Any move below that level will signal additional losses to the Euro for next week and a further weakening of the European currency down the road.

GBP/USD

The Pound remained range-bound yesterday between the 1.6000 and 1.6115 price levels. The exit from this formation will show us what’s next for the UK currency and as such we offer our scenarios for the event of a breakout: a long trade is suggested just above the 1.6120 level with targets at the 1.6175 and 1.6285 levels and a stops placed below the 1.5990 price tag. On the other hand, should the 1.6000 support is breached downwards, a short trade is advised just below the 1.5990 level with targets coming at the 1.5945 and 1.58440 price level, a stop needs to be placed just above the 1.6120 resistance.

FTSE 100

The FTSE 100 broke lower as expected yesterday and our short entry at the 6,700 points was triggered and we already have reached our first target at the 6,650 points. We now need to move our stops at the breakeven price – actually a few points higher – at the 6,715 points price tag as a retracement might be in play. We believe that the index’s outlook has turned negative for the short-term and our technical studies point to even lower levels.

Gold

Gold moved higher at the start of the day yesterday and closed the remaining 50% of our trade at the $1,325 price level but was unable to hold to this high to trigger our long entry placed just above this level. This worked in our favor since the yellow metal retraced lower right after that and tested the $1,300 support. Gold had a volatile trading session yesterday making hard for us to estimate what’s next for the commodity and with the NFP report scheduled for release later today we would like to stand aside for today. Gold tends to become extremely volatile on NFP releases and with today’s release prone to surprise even a correct suggestion could be stopped out by whipsawing swings. The levels to watch are the $1,300 and $1,325 price levels as they act as temporary boundaries for Gold medium-term outlook, we would want a clear break of either of them to assess what to expect for next week.

All charts have been created using FXCM’s Trading Station platform.

Have a lovely weekend.

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