Alpesh Patel's NEWSLETTERPRO - Dollar devaluates sharply after the NFP report disappoints, will this affect the Fed’s tapering agenda?

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Dollar devaluates sharply after the NFP report disappoints, will this affect the Fed’s tapering agenda?

© Alpesh Patel

MORNING BRIEF

Markets were in turmoil on Friday as the Non-Farm Payrolls report missed expectations by a large margin. The jobs report monitoring the employment market in the US printed at 74k jobs added in the month of December versus a 200k prediction. The figure came below even the most pessimistic prediction of 100k and this caused a sell-off frenzy in Dollar positions. The unemployment level fell down to 6.7% but this is clearly a distorted image as the decline in the unemployment level is not caused by more people going to work but rather a decline in the workforce. This means that more and more people are dropping out of the workforce thus technically reducing the percentage of people wanting to find a job and not being able to do so. This development is definitely a step back for the US Dollar that was poised to appreciate versus the rest of the currencies after the FOMC decision to taper its asset purchases program. Some analysts are making word of the bad weather conditions in December that didn’t allow for many people to go to work for an extended period of time but still this miss in the jobs report will weight in Dollar’s short-term outlook. After the release the Euro and the Pound exploded higher against the Dollar signaling that a medium-term bottom might have been reached for the high-beta currencies at this time. However, given the fact that the US economy has been on a path of beating expectations time after time for the past quarter and keeping in mind that a bad report doesn’t necessarily constitute a change in this trend the question that now emerges is what will the Fed do with its intention to further reduce the current QE levels. The FOMC is due to meet at the end of the month and already there are voices that are discussing the possibility that the committee will refrain from tapering further the QE program at this time or even bring it back to the pre-tapering levels. Our view is that the Fed’s reaction will not be a radical one, they are a large institution that will find it difficult to take back their tapering initiative mainly for two reasons: first, such a reaction would be interpreted by the markets as a sign of major weakness in the Dollar that will negate the whole tapering agenda and second, the Fed has always been of the view that markets are mainly guided by forward guidance and a firm stance in their intention to continue tapering will bring confidence back into investors’ minds. We don’t reject the possibility that they might refrain from tapering at their next meeting since their further tapering steps had been labeled “data dependant” but we think that there’s still room for them to go forward with it rather to take the previous reduction back. The week ahead holds a number of important releases and apart from that we will have the opportunity to hear from several FOMC members discussing their views on further tapering but with a lack of any significant reports coming in today we’d like to see how market participants will start the week. It is important to see if the sell-off in Dollar positions will continue or if investors will keep calm and patient after the miss.

 

The lack of important events today allows currencies to breathe easier

The economic Calendar for today is empty of any significant events and this will allow the major currency pairs to catch their breathes after the steep sell-off in Dollar positions on Friday. We’re very keen to see how the Euro and the Pound will start the week and whether investors will continue to sell Dollars after the large miss in the jobs report. Our view is that the sell-off will not continue, investors will realize that even though the jobs market disappointed in the month of December the US is on path of progress for quite some time now and a single step back doesn’t change a lot.

Economic Calendar

Time

Currency

Event

Importance

Forecast

Previous

19.00

USD

Monthly Budget Statement

Medium

$44.0B

-$135.2B

 

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TECHNICAL ANALYSIS & LEVELS

 

EUR/USD

The Euro exploded higher on Friday after the NFP figures came significantly lower than expected. Our short position was subsequently stopped out at the 1.3665 mark. At this point we’d like to take a step back and better evaluate the outlook for the Single currency. Draghi’s comments on Thursday were negative for the European coin however the NFP report didn’t allow for any decline to take place as investors were caught off guard by the large miss in the jobs data. We believe that at this point nothing has changed regarding the medium term outlook for the Euro, we still believe that a move lower must be expected but this possibility might have been pushed further in the future for now. For the short-term, we’d like to stand on the sidelines for today as we believe it is imperative to see how the currency will start the week. A key support level is the 1.3650 area and if Euro is to continue higher after the disappointing NFP report this support should hold.

GBP/USD

The Pound had quite a volatile day on Friday as it was hit by two unexpected data releases. The Production data missed expectations earlier in the day and our long position was stopped out at the 1.6415 area, quite unfortunately as the miss in the NFPs drove the currency higher to reach the 1.6500 level. Mixed signals for the Cable pair, the UK economy might be losing pace in its recovery progress while at the same time the Dollar was on a decline. Similar to the Euro, we need to take a step back and better examine the Pound’s outlook. For the time being we see no tradable patterns and we will issue no suggestions but we’re very interested to see how the currency will react in the aftermath of both surprises. We see the Pound being better situated against the Dollar in comparison to the Euro and a move higher could be in the cards.

FTSE 100

The FTSE 100 failed to go lower on Friday and remained in the range it holds for the past couple of weeks. Dollar’s sell-off and the disappointing Production data on Friday should have led the FTSE lower but it seems that investors are keeping their calm and waiting for something else. We remain committed in our short trade, our stops have been placed at the 6,780 points level and we’re waiting for the UK index to break out of this sideways pattern.

Gold

Gold continued on its uptrend on Friday and was lifted by the Dollar sell-off to reach as high as the $1,250 area. We discussed in our last report that this level is a significant medium-term resistance and it is important to see whether this uptrend will slow down as it reaches it or whether the Dollar weakness post-NFP will allow Gold to climb above it.

 

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

STOCK MARKET FOCUS

 

[Restricted Content] PLC.

The Alpesh Patel Momentum/Value filter has indicated [Restricted Content] PLC. as our stock of the day. 
Company Information: [Restricted Content]


Created using Sharescope Pro

[Restricted Content] PLC. has been rated an 9 out 10 in our Value/Growth rating and gets an A Grade rating on our Bullish Momentum meter. The P/E ratio is low suggesting that the stock might be  underpriced, the ratio of the price earnings growth is medium and Turnover is up year on year supporting the growth potential. From a technical standpoint, the MACD indicator is pointing upwards in the weekly chart above suggesting further incline. The suggested holding period for a stock of this type is 2-3 months.

Important Information

The filters and settings in the Special Edition of the Sharescope software use Alpesh Patel’s proprietary criteria to generate suggestions of securities worthy of further investigation. They DO NOT CONSTITUTE INVESTMENT ADVICE.

 

This is the free, time-delayed version of NewsletterPro, a subscription-based product.

If you would like to receive it before 7:30am, please subscribe by clicking here.

 

 

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