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Euro Drops Despite Weak U.S. Payroll Report

By:
David Becker
Published: May 4, 2018, 15:48 UTC

The dollar continued to gain traction on Friday, despite a softer than expected U.S. employment report. Eurozone data released over the past week which

GBP/USD daily chart, May 04, 2018

The dollar continued to gain traction on Friday, despite a softer than expected U.S. employment report. Eurozone data released over the past week which included softer than expected EU PMI data.  Not only did the headline U.S. Payroll number miss expectations, but wage growth slowed which weighed on yields.

Technicals

The EUR/USD moved lower on Friday, initially moving higher following the softer than expected payroll report, but ran into resistance near the 200-day moving average near 1.2078.  Target support on the currency pair is the December 2017 lows at 1.1727. Additional support is seen near and upward sloping trend line that comes in near 1.15.  Momentum remains negative as the MACD (moving average convergence divergence) histogram prints in the red with a declining trajectory which points to a lower exchange rate. The fast stochastic is printing a reading of 5, below the oversold trigger level of 20 which could foreshadow a correction.

Non-Farm Payrolls Missed Expectations

U.S. nonfarm payrolls increased 164k in April after a revised 135k rise in March and a 324k jump in February. The unemployment rate fell to 3.9% versus the prior 4.1%, the lowest since December 2000. Average hourly earnings were up a modest 0.1% compared to 0.2% previously which was revised from 0.3%. The workweek was steady at 34.5 for a third straight month. For other details, the labor force dropped 236k after falling 158k in March, while household employment was up 3k after -37k previously. The labor force participation rate dipped to 62.8% from 62.9%. Private payrolls increased 168k, with the goods producing sector adding 49k, with construction up 17k. Manufacturing jobs rose 24k. The private services sector added 119k. Government jobs declined 4k. The tameness of the overall report should cap Treasury yields and will keep the FOMC on a gradual path.

Eurozone March retail sales rose

Eurozone March retail sales rose 0.1% month over month, less than anticipated, and despite the fact that the reading for February was revised up to 0.3% month over month from 0.1% month over month reported initially, this left sales down -0.2% q/q in the first quarter of the year. Sales still rose 0.4% q/q in Q4 last year and the correction explains some of the weakness in Q1 GDP numbers. The weakness was mainly in non-food sales, which in turn may also be partly a reflection of adverse weather conditions, which halted building projects. Overall conditions for consumptions remain positive, with jobless numbers continuing to decline and wage growth slowly picking up.

Eurozone Services PMI unexpectedly were revised Lower

Eurozone Services PMI unexpectedly revised down to 54.7 from 55.0, as Italian and Spanish readings disappointed and the German number was revised down sharply to 53.0 from 54.1 reported initially and versus 53.9 in March. This left the composite at 55.1, versus 55.2 reported initially for the April reading and down from 55.2 in the previous month. Markit said that economic activity continued to expand at a robust pace, with solid growth signalled in both the manufacturing and services sectors but highlighted that growth has downshifted in recent months with the latest expansion of output the slowest since January 2017. Further confirmation then that growth momentum is already waning. It is still too early to say how much of this is part of a correction from the unsustainable levels seen at the end of last year and in a way the weakened growth momentum backs the arguments of those wanting to see the ECB committing to an exit from QE earlier rather than later also to gain some breathing space if downside risks materialize.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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