The Euro Consolidates as Strong EU Inflation is Offset by Robust U.S. Jobs Data

The EUR/USD edged higher on Wednesday in early North American trade, as inflation in the Euro zone accelerated and unemployment dropped.  The decline in the currency pair comes despite a stronger than expected ADP private payroll report that points to stronger jobs growth in the U.S. economy.

Technicals

The EUR/USD edged higher but remains range bound. The exchange rate is caught between resistance near the 10-day moving average at 1.2143, and support near the March 18 lows at 1.2246.  Additional resistance is seen near the 100-day moving average at 1.2143. The exchange rate could receive a boost as the fast stochastic generated a crossover buy signal after moving out of oversold territory which points to accelerating positive momentum.

Eurozone unemployment rate fell back

Eurozone unemployment rate fell back to 8.5%, from 8.6% in the previous month. The dip was in line with expectations and overall jobless numbers are now at the lowest level since early 2009. Cross country differences remain very high, and disappointingly youth unemployment held steady at a much higher 17.7%, with rates ranging from just 6.2% in Germany to 35.5% in Spain. Part of the Eurozone’s problem is that even among the younger generation there is not great willingness to move countries, with language barriers and qualification issues underpinning low labor mobility. Furthermore, the ECB has highlighted that wider levels of underemployment remain high, which partly explains the fact that wage growth has not picked up to an extent that the improvement on official jobless numbers would suggest. Still, the renewed improvement in the headline rate will underpin confidence that even underlying inflation has now turned a corner.

Eurozone March HICP inflation accelerate

Eurozone March HICP inflation accelerated to 1.4% year over year, February was revised up to 1.2% year over year. The acceleration in the headline rate was in line with expectations and mainly due to a rebound in food inflation last month, which accelerated to 2.2% year over year, after falling back to 1.0% year over year in February. Base effects from the long and harsh winter as well as the earlier timing of Easter this year, underpinned the uptick and as we expected core inflation held steady for a third consecutive month at just 1.0%. This is still far below the ECB’s 2% target, but officials seem increasingly convinced that underlying inflation has now turned a corner and with PMI surveys still reporting that capacity shortages are curtailing the room for a further expansion in growth, the case for a phasing out of QE by the end of the year remains unchanged. Indeed, services price inflation actually accelerated to 1.5% year over year from 1.3% year over year although here the Easter effect will be more pronounced and the measure is likely to fall back again on Easter related base effects in April.

The UK’s March construction PMI was much weaker than expected

The UK’s March construction PMI was much weaker than expected at 47.0, down from 51.4 in February. The medina forecast had been for a modest dip to 51.0. The indicator points to a sector back in contraction after five consecutive months of modest expansion. The decline is the biggest month-to-month fall since June-July 2016, which was caused by the unexpected vote to leave Brexit, with the blame this time falling squarely on the inclement weather conditions that were seen over the survey period. Civil engineering work was particularly hard hit, with activity falling at the quickest pace in five years. Input cost inflation ebbed to a 20-month low, too. The report also contains some more encouraging news, with employment rising to the strongest pace so far this year and confidence for the year ahead at its best since July last year.

U.S. ADP reported private payrolls rose More than Expected

U.S. ADP reported private payrolls rose 241k in March, stronger than expected, following an upwardly revised 246k increase in February which was 235k. The goods producing sector added 65k workers, with an additional 176k going into services. In the goods producing area, construction added 31k and manufacturing increased 29k. Service sector employment included a 40k climb in the trade/transport area, with education 28k higher and a 26k gain in leisure. Medium sized firms added 127k workers. The data suggest some upside risk nonfarm payrolls in Friday’s BLS report.

U.S. MBA mortgage market index sank

U.S. MBA mortgage market index sank 3.3% in data released earlier, along with a 2.1% decline in the purchase index and a 4.9% dive in the refinancing index for the week ended March 30. The average 30-year fixed mortgage rate was unchanged at 4.69% after being constrained by quarter-end forces and trade war concerns, though still elevated. The housing sector remains resilient with still firm global growth and low unemployment, though low inventories remain a constraint and financial market volatility potentially problematic.