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by Charalambos Pissouros

NFPs in the Limelight, Eurozone Inflation in Focus as Well

The US dollar traded higher against almost all of the other G10 currencies yesterday, as some participants may have decided to cover some of their prior short positions ahead of the US employment report, scheduled for today. Expectations are for a decent report, but we doubt that it could affect expectations with regards to the Fed’s future policy plans. The euro was the main loser, feeling the heat of another quarter of economic contraction in Italy, as well as concerns over Germany’s growth by ECB’s Weidmann.

USD Gains Ahead of US Jobs Report, US-China Talks End on Positive Note

The dollar traded higher against all but one of the other G10 currencies on Thursday, as USD-traders may have decided to cover some of their short positions initiated after the more dovish than expected shift by the Fed. The greenback gained the most against EUR, NOK, SEK and AUD, while it traded virtually unchanged against NZD.

USD performance G10 currencies

As for today, USD-traders may lock their gaze on the US employment data for January. Expectations have changed and now suggest that non-farm payrolls have increased 165k, much less than December’s astounding 312k. The unemployment rate is forecast to have held steady at 3.9%, while average hourly earnings are anticipated to have slowed to +0.3% mom from +0.4% in December. That said, barring any revisions to the prior monthly prints, this is likely to leave the yoy rate untouched at +3.2%, as the mom rate of January 2018, which will be excluded from the yearly calculation, was also +0.3%.

US earnings vs core CPI wages vs inflaiton

Overall, despite the potential slowdown in NFPs (which we see as normal given the prior surge), the forecasts suggest that we are likely to get another report consistent with further tightening in the US labor market. That said, we doubt that it could affect expectations with regards to the Fed’s future policy plans, especially just two days after the Committee changed its forward guidance and signaled patience with regards to future rate moves, already acknowledging the strength of the labor market.

As for the dollar, it could gain somewhat if the low unemployment rate and the strong wage growth are accompanied by an upside surprise in NFPs, as this could ease some concerns with regards to the health of the US economy. On the other hand, a disappointing report could add to market expectations that the Fed is unlikely to push the hiking button this year, with the greenback resuming its latest downtrend. As far as the stock market is concerned, instead of focusing on wage growth as was the case a few months ago, equity investors are likely to pay more attention on the NFP print and the unemployment rate for clues on how economic activity has been performing.

Speaking about the stock market, the S&P 500 and Nasdaq gained yesterday, while Dow closed virtually unchanged.  The Wall Street may have been helped by strong earnings from Facebook and General Electric Co, as well as headlines over the US-China trade saga. As we expected, this round of talks was also accompanied by positive remarks, but no final accord. US President Trump said he would meet with his Chinese counterpart Xi Jinping soon for finalizing a deal, while US Trade Representative Robert Lighthizer said there was “substantial progress”. China’s trade delegation also acknowledged “important progress” for the current stage.

NZD/USD – Technical Outlook

NZD/USD keeps on climbing higher, forming higher lows and higher highs. At the time of this analysis, the pair has stalled slightly, after hitting the 0.6940 resistance level yesterday. Another positive aspect is that NZD/USD is trading above a short-term steep upside line taken from the low of January 22nd. For now, we will continue targeting higher areas, as, in our view, the current pause might allow the bulls to refuel, before driving the pair back up again.

But before NZD/USD could travel back up again, there is a chance of seeing a bit of retracement back down towards the above-mentioned upside line. If that line remains intact, we may see the bulls stepping in and pushing the pair in the upwards direction again. If the buying activity is strong, the rate could move above a temporary obstacle at 0.6900 and then push towards this week’s high near the 0.6940 barrier for another test. That said, if the barrier is not able to withstand the bull-pressure, the rate-acceleration could lift NZD/USD to the 0.6970 level, marked by the highest point of December.

On the other hand, if the previously-discussed steep upside line gets broken, this could make the bulls worry over the pair’s short-term upside potential. A confirmation break below the 0.6873 hurdle, could invite more bears to the table and we may see NZD/USD sliding to the 0.6856 obstacle, a break of which, might drag the rate lower towards the next potential support area around the 0.6820 level. But this is where the down-move could get a hold up, as slightly below the pair could meet another short-term upside support line, which is running from the low of January 2nd.

NZDUSD 4-hour chart technical analysis

EUR Tumbles on Weidmann’s Remarks, Ahead of EZ CPIs 

The euro was the main loser yesterday, underperforming against all the other G10 currencies. The common currency fell the most against NZD, USD and JPY in that order, while it lost the least against NOK.

EUR performance G10 currencies

During the European morning, the common currency came under selling interest after Eurozone’s GDP data for Q4 confirmed a slowdown for the bloc as a whole, to +1.2% yoy from +1.6%, with Italy slipping into a technical recession, as the country’s economic activity shrank for the second consecutive quarter.  Later in the day, the euro took another hit after ECB Governing Council member and Bundesbank President Jens Weidmann said that Germany’s economic activity may continue to be weak into 2019, which could result in much lower than predicted economic growth. Weidmann is one of the most hawkish ECB members and that’s why the euro felt the heat of his remarks, although he also added that the Bank should not waste time in normalizing policy.

Eurozone GDP vs PMIs

As for today, EUR-traders are likely to turn their attention to the economic calendar and specifically, Eurozone’s preliminary inflation data for January. The headline rate is expected to have declined to +1.4% yoy from +1.6%, something supported by the slowdown in German inflation, while the core rate is anticipated to have held steady at +1.0% yoy for the third consecutive month.

Germany vs Eurozone CPIs inflation

At last week’s ECB meeting, President Draghi noted that the risks surrounding the Euro area economic outlook have shifted to the downside, but remained confident in the continued sustained convergence of inflation towards their target due to a strong labor market and rising wages. However, with the headline inflation rate drifting further below the ECB’s target of “below, but close to 2%”, and underlying inflation staying stubbornly well underneath that objective, investors my increase their bets with regards to a delay in the Bank’s first hike, as well as the introduction of a new round of TLTROs, perhaps as early as at the March gathering.

EUR/CAD – Technical Outlook

EUR/CAD continues to drift lower, trading below a short-term downside resistance line, taken from the high of January 7th. In our view, the downside scenario could be in play for a while more and our oscillators are also suggesting that there could still be some bearish-pressure left. We will continue targeting slightly lower areas, at least for a short period of time.

Yesterday, EUR/CAD found good support near the 1.5020 hurdle, from which the rate rebounded a bit. If the pair makes another attempt to test that hurdle and eventually breaks it, then we may see a continuation of the rate-dropping, where the next potential area of support could be seen at the 1.4950 obstacle, marked by the low of November 23rd. Of course, at some point we could see a small retracement back up, but if the bears remain strong, EUR/CAD might slide back down and break the 1.4950 obstacle. This may lead the rate slightly lower to test the 1.4915 level, which is the low of December 3rd.

Alternatively, in order to examine the upside scenario, at least in the near-term, we would like to see a break above the aforementioned downside resistance line, which could open the door to slightly higher areas. But for a better confirmation, a break above this week’s high, at the 1.5190 barrier, may be well needed. This might clear the path towards the 1.5224 barrier, a break of which could send the rate much higher. The next possible resistance zone could be seen near the 1.5300 level, marked by the high of January 10th.

EUR/CAD 4-hour chart technical analysis

As for the Rest of Today’s Events

Apart from the US jobs data and Eurozone’s inflation numbers, the final Euro area and US Markit manufacturing PMIs for January are due to be released, but as usual, they are expected to confirm their preliminary estimates. The ISM manufacturing index for January is also coming out and expectations are for a tick down to 54.2 from 54.3. The final UoM consumer sentiment index for the month is coming out as well.

As for the speakers, we have one on today’s agenda: Dallas Fed President Robert Kaplan.

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