Daily Commentary | US employment data cement a March hike | 13/03/17

13.03.2017, 11am

Daily Commentary • US employment data cement a March hike The US economy added 235k jobs in February data showed on Friday, more than the consensus for 190k, and a number consistent with further tightening in the labor market. Meanwhile, January’s figure was revised up to 238k from 227k. The unemployment rate ticked down, while the labor force participation rate ticked up, indicating both an increase in the number of people available to work and a decrease in the number of unemployed people. However, wages disappointed again, with average hourly earnings rising +0.2% mom, the same pace as in January and below the forecast of +0.3% mom. Nonetheless, in yearly terms earnings accelerated to +2.8% yoy from +2.6% yoy. Even though wage growth missed its forecast, the print is not soft enough to derail the Fed’s plans for a rate hike this week, in our view. This is evident by the fact that the probability for a March hike remained almost unchanged in the aftermath of the jobs data, at roughly 90% according to the Fed funds futures. The reaction in the dollar was negative on the news, perhaps as investors found an opportunity to lock in some profits on their long USD positions ahead of Wednesday’s FOMC meeting. The focus now turns to that policy meeting. Considering that a hike is almost fully priced in, investors will look for clues with regards to the future rate path, something that may determine the dollar’s forthcoming direction (see below).

• Euro jumps on reports the ECB could raise rates before end of QE The common currency jumped during the European afternoon Friday, following a Bloomberg report that at the latest ECB meeting, policymakers debated whether interest rates could rise before the QE program actually ends. Later, this was confirmed by a Reuters article, which also indicated that the discussion had taken place, but added that it was brief and did not receive a lot of support. Even though the question of whether rates can be raised while still engaged in QE operations may be largely theoretical, it shows that policymakers may have started considering the ways they can end their ultra-loose policy program. At the press conference following last week’s ECB meeting, President Draghi said that the Governing Council previously discussed dropping out the word “lower” from its guidance that interest rates will remain at present or lower levels for an extended period of time. Therefore, these media reports are in line with our view that the next signal for a gradual end of QE will be the removal of “lower” from the ECB’s guidance, as we noted in our comment on Friday. We think that these policy signals could keep the euro supported over the next few days, at least in the absence of incoming French polls showing that Le Pen is gaining back ground on her opponents, and also assuming that the Dutch Eurosceptic candidate Wilders does not win Wednesday’s election.

• EUR/USD surged on Friday due to the combination of the soft US wages and the ECB reports, breaking above the 1.0630 (S2) key barrier, which acted as the upper bound of the sideways range that had been containing the price action since the 17th of February. This has turned the short-term outlook to positive, in our view. Now, the rate looks ready to challenge the 1.0710 (R1) resistance barrier, where a clear break is possible to extent the rally towards the 1.0755 (R2) area. Switching to the daily chart, although the pair is still trading below the downtrend line taken from the peak of the 3rd of May 2016, we prefer to switch to flat for now. The recent rally confirmed a bottom near 1.0500, while it made it clear that an “inverted head and shoulders” may be in the works. A clear close above the crossroad of the aforementioned downtrend line and the 1.0800 (R3) key resistance is possible to signal the completion of the pattern and bring a medium-term trend reversal.

• WTI drops on rising rig count Oil prices dropped again on Friday, following the release of the Baker Hughes rig count, which showed that the number of active US oil rigs continued to increase, reaching a level last seen in October 2015. WTI tumbled after it hit resistance at 50.50 (R3), fell below the support line of 49.00 (R1), and stopped at 48.40 (S1). Last week’s slide is in line with our long-held view that following the OPEC consensus, higher oil prices would invite US shale producers back into the market, thereby keeping a lid on oil price gains. We expect the precious liquid to remain under pressure at least in the short run, weighed on by signs that US supply is increasing, as well as the possibility that OPEC does not follow up with another deal to limit supply when the cartel meets again in May. The short-term outlook appears negative from a technical standpoint as well and as such, we would expect a clear dip below 48.40 (S1) to open the way for our next support of 47.50 (S2). Nevertheless, we would stay careful that a corrective bounce may be on the cards before the bears take the reins again, given that the latest slide looks somewhat overextended. With regards to the bigger picture, although the price is still trading above the upside support line taken from the low of the 5th of April, all the aforementioned fundamental factors make us hesitant to trust WTI’s longer-term path. We believe that the likelihood of last week’s correction leading to a reversal is not something to overlook.

• Today’s highlights: During the European day, the economic calendar is empty, with no major indicators due to be released.

• The only event that could attract some attention is in the UK, where lawmakers of the House of Commons will debate the Brexit bill amendment proposed by the House of Lords. Although unlikely, any signs that the Commons could support the amendment as well may prove positive for sterling. Besides UK MPs, we have three more speakers scheduled for today: ECB President Mario Draghi, Vice President Vitor Constancio, and Executive Board member Peter Praet.

• As for the rest of the week, on Tuesday, during the Asian morning, we get China’s retail sales, industrial production and fixed asset investment data, for the months of January and February. From Sweden, we get CPI data for February.

• On Wednesday, the highlight will be the FOMC rate decision. The Committee is widely expected to hike borrowing costs, so we don’t expect a major market reaction in case the Fed simply acts as expected. Investors are likely to quickly turn their attention to the updated “dot plot” for fresh signals on the rate path, as well as Chair Yellen’s press conference. In terms of political events, market participants will keep an eye on the Dutch elections. This is mainly because one of the most popular candidates is Geert Wilders, an outspoken Eurosceptic who wants to hold a “Brexit” style referendum for leaving the EU. As for the economic data, we get US CPI and retail sales figures for February, as well as the UK’s employment report for January.

• On Thursday, we have an extremely busy day, with 4 central bank meetings on the agenda: the Bank of Japan, the Swiss National Bank, the Norges Bank and the Bank of England. All of these Banks are expected to remain on hold.

• On Friday, we have no major events or indicators on the economic agenda.


EUR/USD

• Support: 1.0675 (S1), 1.0630 (S2), 1.0570 (S3)

• Resistance: 1.0710 (R1), 1.0755 (R2), 1.0800 (R3)


WTI

• Support: 48.40 (S1), 47.50 (S2), 45.45 (S3)

• Resistance: 49.00 (R1), 49.70 (R2), 50.50 (R3)




Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68.55% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
We use cookies on this site to improve your website experience. By clicking “Allow” or continuing to use this site you consent to our use of cookies.