EUR/USD Daily Technical Analysis for January 5, 2017

The EUR/USD surged higher testing the September highs following a strong than expected Eurozone PMI Service Report, which was offset by a robust private jobs report released by ADP in the U.S.  The FOMC report showed that the Fed was concerned about inflation but would likely continue to normalize interest rates, while jobless claims remained a depressed levels reflecting a tight labor market.

Technicals

The EUR/USD surged to the 1.2092 level but came off back below 1.2070, consolidating at elevated levels.  Support on the currency pair is seen near the 10-day moving average at 1.1956.  Momentum is positive as the MACD (moving average convergence divergence) histogram prints in the black with an upward sloping trajectory which points to a higher exchange rate. A break of the 1.21 level could lead to a uptrend that will test the 2014 highs at 1.40.

Eurozone PMI Services Were Revised Higher

Eurozone services, composite PMIs revised slightly higher, to 56.6 and 58.1 respectively from 56.5 and 58.0 reported with the preliminary reading. Survey compiler Markit reported that economic growth reached the highest level since early 2011 judging by the numbers, amid near record expansion of manufacturing production and the steepest increase in services sector activity for over six and a half years. Job creation continues but upward price pressures abated slightly in December according to the survey, with rates of increase input costs as well as output charges easing for the first time in five months. Still, Markit stressed that the pace of inflation signaled for both measures remains strong relative to long term trends.

FOMC minutes showed that most policymakers supported the gradual rate hike trajectory. There was considerable debate over inflation in the minutes, as expected, and as seen in Fedspeak over Q4. The majority continued to expect the inflation rate to rise to the 2% target, with many seeing cyclical pressures from the tight labor market pushing prices higher over the medium term. But several officials were concerned by the low inflation expectations, something Chair Yellen had mentioned. A few, meanwhile, believed inflation expectations had been broadly stable over the year despite the low reading on prices and through that would support the Committee’s view of a gradual rise. With respect to risks, there was concern that “inflation pressures could build unduly if output expanded well beyond its maximum sustainable level, perhaps owing to fiscal stimulus,” and that could lead to a steeper trajectory in rate hikes.

Jobs Data is Strong

U.S. ADP reported private payrolls increased 250k in December after the 185k November gain which was revised from 190k. This compared to expectations that payrolls would increase by 190K. The goods sector added 28k jobs, including a 9k gain in manufacturing and a 16k jump in construction. The service sector added 222k. Education and health jobs climbed 50k, with trade and transportation employment rising 45k. Leisure/hospitality jobs increased 28k. The data are stronger than expected and could suggest some upside risk to the government payroll forecast.

U.S. Challenger reported announced layoffs dropped 2.6k in December, halving the 5.2k November gain. The 12-month rate contracted at a -3.6% year over year rate following the 30.1% surge in November. Year-to-date reductions total 418.8k, the lowest annual total since 1990. According to the report, the tight labor market and uncertainties over healthcare and tax reform may have kept employers from making long-term staffing decisions. Cost-cutting, closures, and restructuring were the main reasons for the layoffs. Announced hirings declined 53k.

UK December Services PMI Missed Expectations

UK December services PMI came in near expectations at 54.2 in the headline reading, recovering from the dip seen in the month prior to 53.8. The median forecast had been for a 54.0 outcome. The details of the report showed that new business fell to its lowest reading since August, and input price inflation rose to a three-month high. The composite PMI worked out at 54.9, unchanged from November and, after the disappointing construction and manufacturing PMI outcomes, slightly off the median forecast for 55.0.