EUR/USD Harmed by Friday’s Blockbuster US Jobs Report, Now Looks to Chair Powell

Blowout US Jobs Report

Friday's employment report blew past estimates, as the US economy added 517,000 jobs in January, while the unemployment rate dropped to 3.4% and the lowest level since 1969. Furthermore, average hours worked increased to 34.7, the highest in almost a year. Wage inflation however eased to 4.4% year-over-year, from 4.9% previously.

Even if this blockbuster report is due to seasonal influences and proves just an outlier, it still supports the Fed's belief that the labor market remains "extremely tight", as communicated by Mr Powell in his press conference following last week's downshift to an 0.25% rate hike. ^[1]

Policy Implications

According to the last Summary of Economic Projections (SEP) from December, central bank officials expect interest rates to peak at a median of 5.1%, which implies another 50 basis points of increases and potentially two more moves. ^[2]

Although the Fed maintained its hawkish stance and guidance for more tightening, Chair Powell did not validate those forecasts, when asked if the SEP is still the best guide. Overall, he did not appear to forcefully push back against market optimism for a lower terminal rate and a pivot. ^[1]

However, Friday's surprisingly strong employment report reinforces the bank's peak rate forecast and markets now seem to embrace this policy path. CME's FedWatch Tool now assigns the highest probability to rates peaking at 5.25% (in line with the Fed), but still projects cuts towards the end of 2023. ^[3]

Hawkish ECB

The European Central Bank meanwhile has out-hawked its US counterpart again, as it raised rates by 0.5% again last Thursday and succinctly expressed the intention for another move of the same size in March., vowing to "stay the course". ^[4]

Regarding the bank's intentions after March, Ms Lagarde clearly stated that this will not be the peak, adding that "we know that we have ground to cover. We know that we are not done". This suggest that the ECB is on course for significant more tightening that the Fed this year, which is reasonable, given the fact that it started later and from lower.

EUR/USD Analysis

Despite the ECB's aggressive messaging, the pair actually declined on Thursday, as the move was largely priced in and markets also stood at some of the less hawkish aspects of President's Lagarde's speech. EUR/USD was knocked then lower on Friday, after the blockbuster US jobs report repriced market expectations around the Fed and took the edge off the policy differential.

Last week we had warned of a test of the EMA200 and the pair now hovers just above this level. Daily closes below it will pause the upside momentum and would bring last month's lows in the spotlight (1.0418), although the daily Ichimoku Cloud has the ability to prevent a breach.

Despite the two-day slump, EUR/USD steadies today and tries to defend the key EMA200. As long as this holds, bulls have the ability to push for higher highs (1.1067), but we are cautious about their ability to pursue 1.1274.

Focus now shifts to Tuesday's speech by Fed Chair Powell at Economic Club of Washington, which will be eagerly anticipated after the recent decision and the strong jobs report, for more clues in regarding to the policy path.