Upside Risks For EUR/USD; Downside Risks For USD/JPY
EUR/USD rallies over 1% to 2-1/2 week highs
The euro rallied over 1% to two-and-a-half week highs against the U.S. dollar on Friday, after data showing that the U.S. economy added far less jobs than expected last month sent the greenback broadly lower.
EUR/USD hit 1.1350 during U.S. morning trade, the pair’s highest since May 17; the pair subsequently consolidated at 1.1345, jumping 1.72%.
The pair was likely to find support at 1.1137, the session low and resistance at 1.1382, the high of May 13.
The Labor Department said the U.S. economy added 38,000 jobs in May, far below expectations for an increase of 164,000. The economy created 123,000 jobs in April, whose figure was revised from a previously estimated gain of 160,000.
However, the report also showed that the U.S. unemployment rate fell to a more than eight-year low of 4.7% last month from 5.0% in April, compared to expectations for a downtick to 4.9%.
Average hourly earnings rose by 0.2% in May, in line with expectations.
The report dampened optimism over the strength of the U.S. job market et lowered expectations for a rate hike by the Fed this month.
Fed Chair Janet Yellen said late last week that it could be appropriate to raise rates in the coming months if the economy and the labor market continue to pick up as expected.
In addition, the Institute of Supply Management said its non-manufacturing purchasing manager's index fell to 52.9 last month from 55.7 in April. It was the weakest reading since February 2014. Analysts had expected the index to drop to 55.5.
A separate report showed that the U.S. trade deficit widened to $37.40 billion in April from $35.50 billion in March, whose figure was revised from a previously estimated deficit of $40.40 billion. Analysts expected the trade deficit to widen to $41.30 billion in April.
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We continue to expect data in the weeks ahead to prevent Fed rate hikes, with our economics team forecasting a below-consensus 110k reading on Friday’s non-farm payroll release.
We continue to view risks as lying to the upside in EURUSD and downside in USDJPY from current levels.
We view that news from Japan that PM Abe is delaying the sales tax hike and will boost fiscal spending in the Autumn is a negative for the JPY as it supports our “resuscitating Abenomics” theme. For now, however, the news is being interpreted as JPY bullish as it limits the likelihood of BoJ easing over the months ahead.
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