Lagarde’s Hawkish Shift Lifts Euro, BOE Hikes, US Payrolls Next

Michael Moran, Senior Currency Strategist at ACY

04.02.2022 12:15 pm

#stocks

Summary: ECB President Christine Lagarde shifted to a hawkish stance which lifted German 10-year bond yields a whopping 11 basis points to 0.14% (0.03%). The Euro (EUR/USD), which had been languishing near June 2020 lows at the start of this week, rocketed 1.2% higher to finish at 1.1435 (1.1267 Wednesday). On the other side of the Atlantic, the US ADP Private Sector Employment fell by 301,000 Jobs in January. Which surprised analysts who had forecasted a median rise of between 185,000 and 205,000. The employment component of the US ISM Services also slumped to 52.3 from 54.7 which the weakest since October last year. The Dollar Index (DXY), which measures the value of the Greenback against a basket of 6 major currencies, tumbled 0.59% to 95.37 (96.35), the lowest finish in over 2 weeks. Sterling rallied against the US Dollar (GBP/USD) to 1.3595 from 1.3525 after the Bank of England hiked its Official Bank Rate by 0.25% to 0.50%. The 25-basis point rate hike by the BOE was widely expected. Some market participants had anticipated a 0.5% hike. The Australian Dollar (AUD/USD) climbed to 0.7135 from 0.7117 while the Kiwi (NZD/USD) rallied to 0.6660 from 0.6639 Wednesday. The USD/JPY pair edged up to finish at 114.90 from 114.75. Against the Asian and Emerging Market currencies, the Greenback was mostly lower. The USD/SGD pair dipped to 1.3440 from 1.3485 while USD/CNH (Dollar-Offshore Chinese Yuan) eased to 6.3545 from 6.3695 Wednesday. Equity markets had a choppy session, tumbling lower before climbing to settle. The hawkish turns from the ECB and BOE weighed on risk sentiment. The DOW settled at 35,315 from 35,360 while the S&P 500 dipped to 4,530 from 4,540 Wednesday.
US Treasury bond yields rose. The benchmark 10-year note settled at 1.83% (1.80% Wednesday). Two-year US yields were up one bp at 1.19%. The UK 10-year Gilt Yield rose 6 basis points to 1.36%.

EUR/USD – the shared currency soared to an overnight high at 1.1451 from Wednesday’s close at 1.1267. The Euro also rallied against other major currencies following the hawkish shift from ECB President Lagarde. In her press conference, Lagarde said inflation risks had tilted to the upside. Which, combined with the 11 bp rise in German rates, boosted the Euro.

(Source: Finlogix.com)

GBP/USD – in contrast, Sterling’s rise was modest compared with the Euro. The British Pound responded to the Bank of England’s rate hike by 0.25 basis points to 0.50% soaring to an overnight high at 1.3638 before easing to 1.3595 in late New York. Some traders had expected a 50-basis point hike from the BOE and were left disappointed.
AUD/USD – Despite broad-based US Dollar weakness, the Aussie’s rally was muted. The Australian Dollar settled 0.20% up against the Greenback to 0.7135 (0.7117). Earlier this week, the RBA left its interest rates unchanged, preferring to remain “patient.” Overnight high traded for the Aussie was at 0.7168.
USD/JPY – the higher US 10-year bond yield, up to 1.83% (1.80%) contrasted with Japan’s 10-year JGB rate which was unchanged at 0.17%. This pushed the USD/JPY rate up to 114.90 from 114.75 on Wednesday. Overnight, the USD/JPY rose to 114.97 before dipping.

On the Lookout: Today’s economic calendar is light compared to earlier in the week. However, it’s the US Payrolls report which is the highlight. Prior to that, other economic data releases kicked off earlier with New Zealand’s December Building Consents which were up 0.6% and matched a previous number of 0.6%. Chinese markets are still out today celebrating the Lunar New Year (Spring Festival Golden Week). Australia’s RBA releases its Statement on Monetary Policy (11. 30 am Sydney). Germany kicks off European data with it’s December Factory Orders (m/m f/c 0.5% from 3.7% - ACY Finlogix). France follows next with its December Industrial Production (m/m f/c 0.5% from -0.4% - ACY FInlogix). Germany releases its January Construction PMI (no f/c, previous was 48.2). The UK is next with its UK Construction PMI for January (f/c 54.3 from 54.3). The Eurozone releases its December Retail Sales report (m/m f/c -0.5% from 1.05; y/y f/c 5.1% from 7.8%). Canada follows next with its Employment Change for January (f/c -117.5 K from 54.7 K – ACY FInlogix). Canada’s Unemployment Rate is forecast to rise to 6.2% from 5.9% - ACY Finlogix). Canada also releases its IVEY PMI report for January (f/c 55.1 from 45.0 – Forex Factory). The US rounds up today’s economic data releases with its Average Hourly Earnings (m/m f/c 0.5% from 0.6%; y/y f/c 5.2% from 4.7% - ACY Finlogix), US January Unemployment Rate (f/c 3.9% from 3.9% - ACY Finlogix), US January Non-Farms Payrolls (f/c 150,000 from previous 199,000 -ACY Finlogix). Other estimates from Forex Factory for US NFP are 110,000, FX Street US NFP f/c is 150,000).

Trading Perspective: The Greenback could be in for further punishment should the US Non-Farms Payrolls disappoint. Markets are already forecasting an anaemic US January Payrolls increase from between 110,000 to 150,000 from December’s 199,000 jobs creation. The drop in the US ADP Payrolls by 301,000 jobs in January against median expectations of a fall of 195,000 surprised many analysts and traders. That said, the ADP Private Payrolls report was never an accurate predictor for the NFP. If the US NFP increase is around the 110,000 mark or less, expect more aggressive sellers of the Greenback to emerge. The Euro, given Christine Lagarde’s surprise hawkish shift, will benefit most. The NFP number would have to see a jobs creation of more than 150,000 jobs, say around 180,000-200,000 for the US Dollar to turn back higher. Wages will also be looked at. Expectations are for a m/m drop to 0.5% from 0.6% while y/y wages are forecast to climb to 5.2% from 4.7% - ACY Finlogix). Any number outside of that, higher or lower, could impact the DXY. It’s Friday, Payrolls Day, and as famous American ring announcer Michael Buffer’s catchphrase goes: “Let’s get ready to rumble.” Happy Days!

EUR/USD – The Euro’s rally was impressive because the number of speculative shorts had been growing since the start of the year. ECB President Christine Lagarde surprised many with her hawkish shift. The shared currency was languishing around 1.1145 a week ago with many, including myself, thinking 1.10 was a foregone conclusion. Overnight the EUR/USD pair hit a high at 1.1451. Today’s immediate resistance at 1.1450 should hold into the US NFP report. The next resistance level lies at 1.1450/1.1500, which is tough to break. Immediate support lies at 1.1400, 1.1380 and 1.1350. Look for a choppy day today with a likely range between 1.1360-1.1460. At current levels, would rather sell than buy the Euro.
AUD/USD – The Aussie Battler survived the week, rallying a modest 0.20% despite a mostly risk-averse environment. Overall US Dollar weakness aided the Aussie which saw an overnight high at 0.7168 before sliding to its New York close at 0.7135. Immediate resistance today lies at 0.7170 followed by 0.7200 and 0.7230. Immediate support is found at 0.7110 (overnight low) followed by 0.7080 and 0.7050. Expect more volatile moves on the Aussie today. Likely range 0.7085-0.7185. Just trade the range shag on this one, it will be choppy.
GBP/USD – Sterling rallied against the overall weaker Greenback to 1.3595 from 1.3525 on Wednesday. Overnight high for the British currency was at 1.3628. Many had anticipated a rate hike from the Bank of England with some looking for a larger hike of 50 basis points. For today, immediate resistance is found at 1.3625 followed by 1.3660. On the downside, look for support at 1.3560 and 1.3530. Expect a wild ride in this currency pair as well. Likely range 1.3535-1.3635. Just trade the range shag on this one, be nimble. Prefer to sell rallies.
USD/JPY – against the Japanese Yen, the Greenback rose to 114.90 from 114.75 (Wednesday). Overnight high traded was at 114.97. Immediate resistance on the day lies at 115.00 followed by 115.30 and 115.60. The USD/JPY pair traded to an overnight low at 114.33. Immediate support on the day lies at 114.60, 114.30 and 114.00 Much depends on the US NFP number and the effect on bond yields. Meantime, expect a choppy range of 114.20-115.20.

It's Friday and Payrolls Day. As famous American ring announcer Michael Buffer’s catchphrase goes: “Let’s get ready to rumble.” Happy Days! Happy Friday and trading all. Top weekend too.

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