Marius Paun | London, UK | Senior dealer | Tuesday, 09th June 2020
One by one the economies around the world have reopened from Coronavirus lockdown or, by and large, are in the process of doing so. Investors sentiment has improved dramatically since stock markets’ lows of mid-March and although many remain cautious, a V shape recovery continues to take shape. In the currency markets, the US dollar is currently under pressure driven by the return of risk-on trades as heightened expectations for ongoing economic recovery reduced safe-harbour demand for the greenback.
Last Friday, the US Department of Labour released its latest non-farm payrolls data which was a shockingly good surprise. Almost all analysts predicted we’re in for more gloomy news, expecting the US to lose more than 8 million jobs last month. Yet, it turned out to be a net gain of 2.5 million jobs, the biggest ever recorded as many furloughed employees have returned to work during the gradual reopening. Demand for various goods or services has shown signs of rebound almost as quickly as it evaporated in the first place and employers needed to reset things in motion.
The jobless rate declined to 13.3% in May from a post-war record high of 14.7% in April fuelling hopes the world’s largest economy is healing after the pandemic. The strongest gains were in the very same industries hit hardest by the lockdown measures. Capital Economics who run the numbers, indicated that ‘leisure and hospitality, retail and construction together made out for more than half of the total rise in the employment’.
Nonetheless even the optimists agreed the numbers will need to be confirmed going forward by the next few months data before more sceptics become convinced this is the real deal. If it turns out the US’s really is on the right track and it’s not just a statistical fluke, the Federal Reserve may need to be less aggressive with its monetary easing policy than previously thought. In turn, interest rates might not stay lower for as long as initially forecast.
On the other hand, the euro has been boosted by the European Central Bank announcement on Thursday of increasing its emergency bond purchasing scheme to 1.35 trillion euros. The Pandemic Emergency Purchase Programme, the latest addition will be 600 billion euros which surpassed expectations. On top of that, Germany, who so far has been accused of being rather tight with its cash, announced a big stimulus of own worth 130 billion euros. Finance Minister Olaf Scholz said it is meant for business and consumers and includes a one-off payment of 300 euros per child.
The move marks a shift from Germany’s status quo fiscal tightness stance and could indicate Germany is getting a bit more serious in its support for a European Union rescue fund. Only time will tell if that help came rather too late politically when reopening the Europe’s economies is well underway. What’s interesting is that normally money printing brings downside pressure on currency. In this case investors contemplate the fact that Germany could mean business this time and especially after Britain’s leaving, they want to strengthen the case for the eurozone members staying together.
It could also be out of outright necessity. European Banks have done dreadfully after 2008 crisis compared with their US and UK counterparts. But again, the US fixed its banking system very quickly after the credit crisis, the UK took longer but it has done it as well. The eurozone is still struggling to match the pace of correction, mainly because the ECB answers to a lot of individual governments which despite the rhetoric, have little interest in supporting each other’s banking systems. If now is not a good excuse in front of German public to open the wallet, it probably will be difficult to find a better time!
EURUSD was trading just below 1.1340 on Tuesday afternoon, not far from the strongest level in almost three months at 1.1383, reached on 05th of June. The chart shows a steep selloff lasting two weeks in March followed by a quick rebound. It has gone sideways largely between 1.08 – 1.10 for two months until recently when it broke higher. The current price level more or less matches the level before Covid-19 slump.
The short-term moving averages are above the long-term ones and both pointing upwards. The price is above them. All these are bullish signals. On the upside we can see resistance at 1.1330 has just been breached but it needs to be confirmed with a close above it. Next in line for the bulls will be the aforementioned 1.1383, the three months high. On the downside, sellers could target 1.1240 followed by support at 1.1190. 61.8% Fibonacci retracement at 1.1170 could also be in the bears’ mind.