EUR/USD edged up on Friday after disappointing employment statistics from the United States. According to the US nonfarm payroll employment data released by the Bureau of Labor Statistics, employment increased in March by 88,000, significantly below economists' forecast of 190,000 from a Bloomberg survey, with unemployment slightly lower at 7.6 percent (previously 7.7 percent). This suggests that employers hired fewer workers in March than previously thought, and this fact is all the more disappointing when considering that unemployment only decreased statistically due to 496,000 people dropping out of the workforce, bringing the participation to its lowest level since 1979. On the other hand, it should be mentioned that the numbers for January and February were revised up: Apparently, 148,000 new jobs were added in January (instead of only 119,000) and 268,000 jobs were created in February (50,000 more than previously estimated).
Still, last month's numbers raise fresh concerns about the dynamics of the US labour market and the real growth of the country's economy. After all, this was the lowest growth rate of jobs in nine months. Looking ahead, this does not paint an optimistic picture, with US austerity slowly beginning to kick in (overall, 7,000 jobs were cut in the government sector in March) and the Fed having to reduce its bond purchases eventually. The markets were quick to react to the bad news: While stocks suffered, money went into US Treasuries. The dollar is currently trading at $1.30155 against the euro, roughly 200 pips above Wednesday's levels, helping the euro to end the week on a bullish note -- although I doubt this to be much desired by the euro area, which is in need of a weak euro to fuel its ailing economy, as hinted at during yesterday's ECB press conference.
As expected, the European Central Bank did not change key interest rates on Thursday. The interest rate on the main refinancing operations and the rates on the marginal lending facility and the deposit facility remained at 0.75%, 1.5% and 0% respectively. The main rate is the highest in comparison to the interest rates of other central banks. This is in line with the ECB's thinking that it is up to governments to implement structural reforms at national levels instead of turning to the central bank for more liquidity.
However, the language of ECB President Mario Draghi's introductory statement to the press conference suggests that the ECB may be considering rate cuts in the near future. According to Mr Draghi, the central bank is well aware of the persistence of downside risks for the euro area. Eurostat's latest annual Harmonised Index of Consumer Prices (HICP) estimate for the euro area sees inflation slightly lower in March (1.7%) than in February (1.8%), and the ECB sees inflation expectations in line with price stability over the medium to long term.
The ECB is likely to observe the economic recovery of the euro zone for a while before taking any actions. While I would not expect any new programmes as bold as the announced asset purchases of the Bank of Japan, an interest rate cut has certainly become more likely at a three-month horizon following the recent bad news in Europe and the BoJ's renewed easing efforts.
The euro shot up 100 pips against the dollar following the ECB's press release. As of this post, EUR/USD traded at $1.2857.
The EUR/USD currency pair has fallen in Thursday trading, as the market is waiting for today's European Central Bank interest rate announcement and Mario Draghi's comments. Currently, the euro is struggling to stay above the $1.28 level. I don't expect the ECB president to announce any drastic measures today, but event risk for euro buyers may have increased somewhat following the Bank of Japan's announcement of doubling its quantitative easing efforts. Still, the Draghi Q&A session always has the potential to move exchange rates, as market participants carefully listen to and interpret every word the central bank president may have to say. It is likely that critical questions relating to Cyprus feature prominently during the session, but again, I don't expect any real news from the ECB today.
On a related note, there were no news from the Bank of England today. It held interest rates constant at the all-time low of 0.5 percent and did not announce any changes to its QE programme, despite the BoJ's move during the night.
The euro continued its fall against most major currencies on concerns over the area's economic health ahead of Thursday's European Central Bank meeting. The Cypriot bailout is still pretty much an unknown variable for investors, especially with regard to possible central bank actions. Market participants reportedly think the recent soft inflation numbers suggest a higher probability of a rate cut, but I think such bold actions remain very unlikely. However, even on top of the bad news coming out of Cyprus there is no shortage of downside risk for the single currency at the moment, with a record-high 12 percent eurozone unemployment in February and a slower manufacturing activity in March.
As of this writing, EUR/GBP was 0.12 percent lower at £0.848 and EUR/JPY was 0.37 percent lower at ¥119.29. The euro was 0.18 percent higher against the dollar at $1.2848 following the release of a disappointing US ISM non-manufacturing PMI, which fell from 56 to 54.4, indicating a slowdown in the country's service sector growth, but the EUR remained near its recent year-to-date low.
The situation is unlikely to change significantly tomorrow, suggesting that the EUR might test its $1.28 supporting level again sooner rather than later.