April 15th, 2015
by Michael Grogan, First Class Analytics
Overall, I have maintained a bearish view of the Euro versus the U.S. Dollar on a macroeconomic basis, based on comparatively weak European growth and expectations of rate rises in the United States. However, as any market participant knows, long-term trends do not take account of those short volatility spikes that forex traders seek to exploit.
On March 3 at 12:48 GMT, the Euro rose sharply against the Dollar from a level of 1.0890 to 1.1010 ahead of the release of the US jobs report:
Clearly, a long EUR trade was the right call on a speculative basis. However, is this short-term spike in the Euro just that, or does this mark the beginning of a longer-term trend? Firstly, it is interesting to note that in terms of non-farm payrolls, only 126,000 jobs were created in March, which is at the lowest level since January 2014:
In terms of looking at a five-year basis, while the current rate of jobs growth has not reached the lows of 2010, it is certainly trading at the lower end of the bell curve when compared to previous years. Unemployment at a level of 5.5% nevertheless remains at among the lowest levels in seven years. The Euro Area continues to improve in this regard, with an unemployment rate of 11.3% being the lowest rate since May 2012.
There is no doubt that despite short-term jitters, the United States has the better economy. Therefore, I expect that going forward any further upside in EUR/USD will be due to USD weakness rather than EUR strength. In many ways, I see the reaction of the Federal Reserve going forward as being a significant barometer for the future movements of this currency pair. According to the Financial Times, the Federal Reserve has indicated that June will be the earliest possible month for a rate increase.
Additionally, another two payroll reports will precede this, which will give a clearer indication going forward as to what the Fed's likely stance will be. Going forward, I expect that looking forward to June, this month will be a big telling point in where the Euro goes from here. Realistically, I would expect that should we see a level of 1.13 or higher, this is an indication that the EUR will start to make back significant gains, at which point a long-term bullish view would be feasible.
However, it could be that lower US job growth has merely had a temporary setback on the USD, and should the EUR fail to make significant gains this month, I expect it will fall further in spite of short-term economic concerns in the United States.
Disclaimer: I took a long position in EUR/USD at an opening rate of 1.0919 and closed out at 1.0993 on 3rd April 2015.