At the beginning of the last week it seemed that stock markets were set for a comeback to their peaks from January and EURUSD looked bound to reverse at least some loses versus the dollar. The set of lackluster macroeconomic releases from the US changed this picture. Neither of the reports including Conference Board sentiment index, home sales or weekly initial claims would had been able to had a major market influence by itself. However, taken together they create a worrying mix of weak labor market and scarce confidence among US consumers. The latter will not improve unless there is a steady increase in employment. Companies will not employ unless they are confident in future demand and so the vicious circle closes. The idea of extraordinary stimulus (fiscal and monetary) was to encourage demand so the companies increase output, refrain from excessive layoffs and – at some point – start increasing employment again, spurring private demand and relieving a burden on a public sector. The latest data suggest that it might not happen or at least not as smoothly as investors could expect.

So far, the reaction was moderate. US equities slid down but the loses were mostly covered. The EURUSD didn’t take advantage of an opportunity for a rebound but then again the key defense at 1,3440 was successful. Investors may have refrained from reacting before the payrolls reading. The consensus stands at around -40k for now. Any increase in employment would erase mentioned worries and help drive equities back to maximums. Such reading should help the EURUSD too but if the rise is exceptionally strong (say 50k+) a rise in FRAs could create a flow of trades in the opposite direction. A reading of -100k or worse is likely to cause a panic on equities and another wave of selling on the EURUSD.  

The US data (including also ISMs and ADP report) will overshadow central bank meetings taking place in Australia, Canada, UK and euro zone. Among those four, the Australian one might be the most interesting one, as the Bank of Australia is expected to increase rates after a pause. If it does so and if the data (retail sales to be released right before the rate decision) support the Aussie, it might not only gain vs. USD or JPY but there is also a chance to test (yet another time) a multiyear high vs. NZD.

Przemysław Kwiecień Chief Economist

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