The dollar surged across the board following the blockbuster NFP. Yet since the initial reaction, there hasn’t been a lot of further action.
EUR/USD consolidated in what seems like a dead cat bounce on the chart. And there seem to be good reasons for the pair to continue down also according to fundamentals.
Strengths in the NFP
The jobs report not only showed a big gain of 271K jobs, compensating for two dismal months. This could have been dismissed by seasonal factors: hiring towards the long Thanksgiving / Christmas season.
However, temporary retail jobs are not supposed to pay too much. However, annual wages finally broke above resistance at 2.3% and jumped all the way to 2.5%. This is great news in itself and even more important in the context of seasonal patterns.
Market reactions
Together with the rise in the greenback, the implied probability of a hike jumped to around 70%. This is solid, but not definite.
EUR/USDÂ did make a decisive break under support at 1.0810, the July 20th low and hit support at 1.0710. However, since then it bounced, getting close to 1.08. There still is a long way down towards the lows of the year at 1.0460.
The failure to re-challenge the previous support line is telling, but it’s not all.
Fed doves cry, ECB wants to cut
The positive report was welcomed by Fed officials that spoke after the event. Support for a hike from bullish members like Bullard were not surprising. Yet it seems that the doves are coming around to a hike as well.
Charles Evans, the president of the Chicago Fed, is a known dove. He doesn’t weaken the greenback when he wants to delay a hike. This time was different. Evans said that “conditions look like they could be right for a rate hikeâ€
Also the president of the Boston Fed , Eric Rosengren said that the worst of the worries the Fed had in September have not materialized and that they should hike if conditions continue improving. Rosengren isn’t as dovish as Evans, but certainly leans to that direction and hes seems ready for liftoff.
And on the other side of the Atlantic, there was a report that the ECB is considering cutting the interest rates quite deeply. In the past, they said that rates have reached their lower bound, but Draghi hinted about going lower.
In Denmark and Switzerland the rates are far lower: -0.75% and the ECB could push towards these levels. EUR/USD dropped on this report but didn’t go too deep.
This is another reason for weakness in the pair, once this consolidation phase ends.
EUR/USD lines to watch
The current range is 1.0710 to 1.0790 – the consolidation range. Below, 1.0650 was a double bottom in April and serves as the next significant support line.
Below, 1.0530 was the low point in April and works as the last defense line before the multi-year low of 1.0460. From there, it’s an open road to parity.
More: EUR/USD: To 1.05, Parity, And Beyond – Goldman Sachs
Here is the chart:
