Today, the main event will be the release of the US employment report for February. Nonfarm payrolls are expected to have risen by 190k, less than the 227k in January, but still a solid number that is consistent with further tightening in the labor market. We see the risks surrounding the NFP forecast as skewed to the upside, considering that the ADP report for February showed the private sector added 297k jobs, far more than the anticipated 190k and that initial jobless claims were unusually low throughout the month. The unemployment rate is expected to have ticked down, while average hourly earnings are forecast to have accelerated on both a monthly and a yearly basis. This would be a sign that the softness in January’s earnings was just an outlier, and coming on top of a robust NFP number, it may seal the deal for a March rate hike. The probability for a hike next week currently rests at 90% according to the Fed funds futures. In case the employment data are as strong as anticipated, or even better, that percentage could surge even further and thereby bring the dollar under renewed buying interest.
ECB: More optimistic, but still too early to debate tapering
The ECB kept its stimulus program unchanged yesterday, as was widely anticipated. In the accompanying statement, the Bank maintained its dovish forward guidance, reiterating that interest rates will remain at present or lower levels for an extended period of time, and that the Bank stands ready to increase its QE program in terms of size and/or duration if the outlook becomes less favorable.
The press conference following the decision had a more hawkish tilt though. Although President Draghi initially reminded investors that there is still no convincing upward trend in underlying inflation, he continued by pointing out that a dovish sentence from his introductory statement had been removed. The sentence said: "If warranted, to achieve its objective the Governing Council will act by using all the instruments available within its mandate". Draghi indicated this was removed to signal there is no longer that sense of urgency in taking further actions. Perhaps in an even more optimistic twist, the President said that the TLTRO loans are about to expire, and that there has been absolutely no discussion about having another round. He further indicated that the Council previously discussed dropping out the word "lower" from its guidance on interest rates. This may be one of the Bank’s next moves.
In our view, these relatively hawkish comments from Draghi suggest that the days of aggressive ECB easing may be behind us. As a result, EUR/USD surged breaking above the 1.0570 (S1) barrier to hit resistance slightly below the 1.0630 (R1) hurdle, which is the upper bound of the sideways range the pair has been trading since the 17th of February. We believe that the euro could remain supported in the next few days, at least in the absence of incoming French polls showing that Le Pen is gaining ground on her rivals. However, we would avoid EUR/USD, considering that today’s US jobs data could prove the trigger for a retreat. Investors may settle near the 1.0630 (R1) hurdle waiting for the report, and could push it lower in case of strong numbers, targeting once again the 1.0570 (S1) barrier as a support. A clear dip below that level is possible to open the way for the 1.0525 (S2) level. Instead, EUR/GBP may be a better proxy for potential near-term euro gains, given that the House of Commons could overturn the "soft Brexit" amendment that the House of Lords passed regarding a "meaningful vote" on the final Brexit deal.
As for the rest of today’s highlights: During the European day, we get Norway’s CPI data for February. The headline rate is forecast to have remained unchanged, while the core rate is expected to have ticked down. Although something like that could bring NOK under renewed selling interest, we doubt that it will have a material impact on the Norges Bank’s neutral stance on policy.
From the UK, we get industrial production data for January, and from Germany, we get the trade balance for January.
We also get Canada’s employment data for February. The consensus is for the unemployment rate to have held steady and for the net change in employment to have remained in positive territory, albeit marginally. We see the risks surrounding the unemployment rate forecast as skewed to the downside, and we see the case for the overall report to be stronger than expected. We base our expectations on the nation’s Markit manufacturing PMI for the month, which showed the strongest increase in employment for 27 months. In case of a better than anticipated report, the Loonie could reverse some of its recent losses. Considering that the US and Canadian data are released at the same time, even in case the Canadian data notably beat expectations and USD/CAD declines, we would expect any such reaction to remain short-lived. The pair could pullback and challenge the 1.3460 (S1) support level, but we still see a short-term uptrend on the 4-hour chart. As such we expect such a retreat to encourage the bulls to initiate new positions and if they prove strong enough to overcome the 1.3530 (R1) level, they may target the key obstacle of 1.3600 (R2). Our view of further near term advances in this pair is also supported by the combination of a hawkish Fed, a dovish BoC, and the latest slide in oil prices. As for the bigger picture though, we prefer to wait for a clear close above 1.3600 (R2), a zone which was proven a strong resistance back in November and December, before we get confident on the resumption of the prevailing longer-term uptrend.
EUR/USD
Support: 1.0570 (S1), 1.0520 (S2), 1.0500 (S3)
Resistance: 1.0630 (R1), 1.0675 (R2), 1.0715 (R3)
USD/CAD
Support: 1.3460 (S1), 1.3425 (S2), 1.3380 (S3)
Resistance: 1.3530 (R1), 1.3600 (R2), 1.3660 (R3)
