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.

Every single leading indicator for non-farm payrolls that we follow signal fewer job losses but a number of these reports saw only small improvements which means that non-farm payrolls, while better could miss expectations. Throughout this month, investors looked past all data weakness in favor of re-openings and the prospect of stronger second-half growth. The question is will they do the same if NFPs miss?

With the unemployment rate expected to rise and earnings expected to slow if payrolls miss expectations, which is likely, the US dollar could pull back driving EUR/USD higher. Psychologically, 19% unemployment is hobbling. However, if the numbers are better all around, we will see a much-needed correction in EUR/USD that will be both sharp and aggressive.

Arguments in Favor of Stronger Payrolls

1. Employment component of ISM Non-Manufacturing rises to 31.8 from 30
2. Employment component of ISM Manufacturing rises to 32.1 from 27.5
3. ADP reports -2.7 million jobs lost vs. -19.55 million
4. 4 week moving average jobless claims at 2.28 million vs 4.18 million
5. Continuing claims at 21.48 million vs. 22.37 million
6. Consumer confidence index rises to 86.6 from 85.7
7. University of Michigan consumer sentiment index rises to 71.8 from 72.3
8. Challenger reports 577.8% increase in layoffs vs. 1,576%

Arguments in Favor of Weaker Payrolls

None

USD/CAD is hovering near 3-month lows ahead of Canada’s labor market report. Like the US, fewer job losses are expected. Given the Bank of Canada’s brighter outlook, the currency pair’s price action also suggests that investors are looking for better numbers from Canada and on a relative basis, Canada could report a more meaningful improvement. With that said, USD/CAD is very oversold and due for a relief rally, so if the US data is good, the market will overweight the US numbers.