Euro – 8 Straight Days Of Gains, Will NFPs Kill The Rally?

Euro rallied higher against the US dollar for the eighth consecutive trading day, marking the longest stretch of gains for the currency pair since April 2011. The European Central Bank was widely expected to boost its bond-buying program and today, they delivered. However, instead of adding 500 billion euros to their Pandemic Emergency Purchase Program, they increased PEPP by EU600 billion and extended the duration of their purchases to at least June 2021. The ECB opted for a larger than expected response to the COVID1-19 economic contraction because “the improvement has so far been tepid and action had to be taken.”

Euro rallied as investors were impressed by the central bank’s willingness to front-load stimulus. While the central bank did not lower interest rates and has been resistant to negative rates, they’ve been aggressive with bond buying. The ECB lowered their economic projections but their forecasts were not weak as the market feared. The ECB sees the economy contracting by 8.7% in 2020 and rebounding by 5.2% in 2021. While Q2 data will be weak and a significant contraction occurred, they expect the recovery to begin in the third quarter as they saw a bottom in May. The central bank remains committed to doing more if needed but today’s actions were not only bigger than expected but laced with optimism. EUR/USD hit 1.13 in the hours that followed with the March high just underneath 1.15 the next major resistance.

While investors are bullish euros and the currency pair is very strong, the sustainability of its rally hinges on Friday’s non-farm payrolls report. USD/JPY traded strongly ahead of the report with 10 year Treasury yields rising more than 11%, a sign that investors expect stronger labor market numbers. Economists are looking for non-farm payrolls to fall by -7.5 million which by any measure is an ugly number. However, compared to the previous month when more than -20 million jobs were lost this is a significant improvement. Unfortunately, more job losses means the unemployment rate is expected to spike to 19.2% from 14.7% with wage growth slowing to 1% from 4.7% in May. US states are easing lockdown restrictions but the “new normal” means it will be a long time before there’s meaningful hiring.

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