By FX Insights Moderator,
Before we dig into this week's fundamentals and market outlook, I want to talk about last Friday's NFP...
As we indicated in Friday's update, last month's NFP data was revised up, the unemployment rate, however, was knocked back below 5.0%, which was opposite of my forecast... with new and continuing jobless claims and vastly diminished new hiring, it's very difficult to understand why the unemployment rate dropped to 4.9%...
We also indicated, we'd see downward pressure on the EUR/USD, which certainly played out Friday, but to a slightly greater degree than I had anticipated... as we stated in the update, though, I still believe the EUR/USD has the potential to re-test the top of the range...
NFP showed a net loss of 17K jobs, which is certainly dismal, but lets keep one fact in mind -- of all the months in the year, January typically shows the biggest decline in new jobs and this is because of the BLS's birth/death model... so, I'm sure we can expect another upward revision next month...
Friday was a great example of why most NFP's are not 100% cut and dry like many traders expect it to be... and although the EUR/USD made an initial push towards all-time highs, in the chat we strongly cautioned against taking any longs on Friday and to simply let the market play out as it wished...
Moving on...
Fundamentally, we have an interesting week ahead of us... not quite as challenging as previous weeks, but there are some key events we need to focus on.
Monday -- The only real key data piece is U.S. factory orders. We'll also get a speech by the Fed's Kroszner... although data is light on Monday, don't necessarily expect the market to be quiet... Monday holds the potential to give us some decent moves and volatility...
Tuesday -- We get some key Eurozone inflation data with German and E-zone PMI and Italian CPI... we may see a bit of contraction in those PMI numbers... another key piece of data is E-zone retail sales. Forecasts show a decent rise from the previous decline... I'm not quite as confident on hot retail numbers. Should we see a downside surprise in retail, this will certainly put some pressure on the EUR and renew talk of possible ECB rate cuts...
Key U.S. data on Tuesday is ISM Non Manufacturing... I believe the market will pay close attention to this release as it will give us a current look at what's happening within the service sector. The service sector is one that has remained resilient while other sectors have stumbled the past 6 months... I don't expect a downside surprise with this data, however, should we see anything below 51, the market could certainly react very negatively against the USD...
Wednesday -- Nothing but USD data today... we start out with Non Farm Productivity... I normally wouldn't pay a whole of attention to this particular piece of data, but I think the market and the Fed will be watching, so I'll be watching too... basically, NFP Productivity is a combo growth-related and inflation-related report, but there's a few weird aspects to this report... in a nutshell, basically the FX market wants to see lower NFP Productivity because that correlates into higher wages being paid for less output, which is inflationary, and inflation is good for a currency as it could lead to rate hikes or less rate cuts... make sense?
OK, we also get three Fed speeches -- Lacker, Kroszner, and Plosser... of course, the market will be looking for any clues on future monetary policy, specifically what the Fed's next move on rates will be in March.
Thursday -- Our biggest fundamental day of the week... early in the morning we get key German factory orders data which I believe will be weak... however, our biggest events of the day is the ECB's decision on interest rates followed by Trichet's press conference...
I absolutely, positively, cannot see the ECB cutting rates on Thursday... I do not believe this option is on the table. In fact, there's a higher probability of the ECB raising rates than there is of them cutting rates... I firmly believe Trichet will keep rates on hold at 4.00%... the biggest factor is that CPI rose from 3.1% to 3.2% which is keeping intense inflation pressure on the Eurozone and is keeping inflation well above the ECB's target rate of 2%.
We also get key Initial Claims data on Thursday... last week jobless claims rose to a staggering 375K... we could certainly see that number revised down this week, which would be USD supportive... keep an eye on this week's headline number... if it stays above 340K and we don't get a downward revision to last week's data, the USD could face renewed sell-offs...
At 10:00 we get Pending Home Sales which the market is expecting to "not be as bad as last month." I'm not really buying it... we've not seen the bottom yet, banks are not lending, consumers aren't qualifying for mortgages, there's a 9-month backlog in home inventories, prices paid are way down... it's still a disasterous mess, so I don't expect any mega upside surprises here...
Friday -- Two key pieces of data out of Germany: German Trade Balance and German Industrial Production... trade balance should back down from last month's number as the euro has remained very strong and global economies are starting to slow... as far as industrial production, I'm not very bullish on this one either...
As far as the Fed goes, we get a speech from Yellen very early in the morning, followed by Lockhart and Pianalto speaking later in the afternoon... don't expect anything groundbreaking from that braintrust...
EUR/USD:
If the market wants to keep correcting down, to me, this is not a sign of the dollar gaining strength... nobody is buying dollars at this point... those corrections we've seen and could see are attributed to profit-taking, loss-taking, fluctuations with gold, oil, and equities... basically all the market correlated variables...
There was very little liquidity in the market on Friday, which also puts downward pressure on the EUR/USD... as far as trading goes, I'm still euro long -- cautiously long, of course... and I will likely look at any further downside correcting as another buying opportunity...
In case you missed it, I did a post on the gold-EUR/USD correlation... please take a moment to check it out as gold is one of the most important market correlated variable... As always, take care to manage your risk and money very closely... do not overleverage your account under these current market conditions of uncertainty and risk aversion...
Lastly, I'll do a live audio Q & A in the chat tomorrow at 1100 EST...
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