The surprisingly positive Non-Farm Payrolls in the US changed the picture for EUR/USD in the weekly look: from a gain to a loss. In an ideal situation for the ECB, the exchange rate of the euro falls without the central bank having to take action.
Is the NFP report doing the job for Draghi and pushing the exchange rate to more acceptable levels? Not exactly. Here are 3 reasons:
- EUR/USD still too strong: At 1.38 and probably also at 1.37, EUR/USD is still too close to the “line in the sand” of 1.40. With flows still coming into peripheral bonds, the bid nature of the euro could send the pair back to 1.40 and this also means that EUR/CNY remains too high. Both economic giants are important trade partners of the euro zone.
- Talk is cheap: The effect of verbal interventions, even though they have become more explicit, are diminishing. The markets are demanding action and not only words. If Draghi doesn’t act, his credibility will fall and the rise of the euro could accelerate.
- Only a catch up NFP?: This excellent jobs report from the US could be a one time spring bounce after the harsh winter months. The upcoming months could be OK but could reflect only a return to the previous levels of job gains and nothing else. April might turn into a catch up month and not an acceleration. So, the report does not imply any acceleration in QE tapering and the subsequent rate hike, which is probably far off. A mediocre jobs report for May could weigh on the dollar once again.
What do you think? Will Draghi act and push the euro much lower? Or will he let it float higher from current levels?
For more, see the EURUSD prediction.
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