EURUSD – everything seems to help the euro

Thursday brought not only a major advance on the EURUSD but also a visible change in sentiment on the forex. Suddenly, everything seems to support the euro. Here’s the list:

• Technically, climbing above 1,3165 reduced significantly risk of a downward scenario and fueled a rise towards an upper line of a downward channel (at around 1,33, the pair managed to climb above that resistance as well) – probably partly on short covering
• Successful auctions – PIGS got their money this week and even if the crisis hits one again (and we think it will) the risk is off the table for a while
• Weekly claims report – a rise to 445 was a negative surprise and significantly deteriorated the dollar’s appeal
• Trichet worried about inflation, Bernanke about unemployment – central bankers took a stage yesterday to remind markets of their different priorities
• Moody’s and S&P warn US government over the fiscal position – while a (rating) cut seems unlikely a negative perspective is a real threat, even this year (as a form of exerting pressure as it was the case with UK)

Therefore, while we think that ’11 lows on the EURUSD are still ahead, euro has some short to mid- term momentum. The pair faces a resistance zone at 1,3433-1,3490. Especially the first level is important. Should the pair move above it, we will have a new local high – a final negation of a new local low made last Friday. In this case the pair may eye 1,37.  

US labor market  – a reason to worry?

As mentioned above, the number of people who claimed the unemployment benefits for the first time in the first week of 2011 in the US rose to 445k – the highest since late October. After a mixed payrolls report, the claims report renewed worries that a revival in the US employment may once again be delayed. In a response, US yields fell, with the FRA18x24 rate below 1,50% for the first time since Dec 21^st .

As of late we received somewhat mixed signals from the US labor market. The huge positive surprise from the ADP and other positive signals including a drop in the unemployment rate and a drop in claims below 400k in the third week of December were overshadowed by a moderate rise in employment indicated by the payrolls report and yesterday’s uptick in claims.

We think that what we are observing is a moderate revival on the labor market – strong enough to push yields somewhat higher in the whole 2011 but weak enough to stop any significant appreciation of the dollar – at least with this Fed. When it comes to claims, one should await a confirmation next week, a baseline scenario will be a return to 400-410k.

Events to watch – US data and JP Morgan

A package of the US macroeconomic figures is what the market is awaiting today. It includes retail sales and inflation (both 8.30 ET, 14.30 CET, consensus +0,8% m/m for headline retail sales and +0,7% m/m for the core; +0,4% m/m for headline inflation, +0,1% m/m for core) with the core inflation probably the key for the dollar. Those releases are followed with the data on output (9.15 ET, 15.15 CET, consensus +0,5% m/m) and consumer sentiment (flash UM index, 9.55 ET, 15.55 CET, consensus 75,6 pts.). JP Morgan is the first financial institution to release quarterly earnings this year (8.00 ET, 14.00 CET, consensus 0,99 USD EPS).  

Przemysław Kwiecień PhD, Chief Economist

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