Euro dropped for a while yesterday after ECB announced rate cut, but it soon came back up and rose to a new high against USD and JPY. The announced policies are not surprising enough and failed to impress the market. What else trader should know before the US NFP release today?

Euro dropped for a while yesterday after ECB announced rate cut, but it soon came back up and rose to a new high against USD and JPY. The announced policies are not surprising enough and failed to impress the market. What else trader should know before the US NFP release today?

Euro

ECB Rate Cut Might Fail, Next Hope For QE

Governor of ECB, Mario Draghi, have announced a string of policies to fight the pressures of deflation and Eurozone contractions. Some of the programs according to The Guardian, are:

  1. Providing 400 billion Euro of low interest credit to be channelled to small firms by Eurozone banks.
  2. Preparing a new market  for the banks to securitise small firm loans.
  3. Eurozone interest rates cut, notably lowering benchmark rate to 0.15% and deposit rate to -0.1%.
  4. Inject liquidity into the market by stopping sterilization of 2011-2012's sovereign bonds.

Mario Draghi further reiterated that ECB is prepared to go further if needed. They admitted that 2% inflation target is unlikely to be attained this year, and insinuated that they are currently planning Quantitative Easing. The Guardian also mentioned that Draghi considered the European election result as a signal that Europe must be able to provide growth, jobs, and peace.

Those words might sound hopeful, but the market easily disregard them, why? There are three reasons why Euro bounced yesterday:

  1. There are no particular surprises. Market speculation has run so high that by the time ECB made the announcement, it is already out-of-date. In such circumstances, any influence that might occur lost in a short time.
  2. Benchmark interest rate cut is a double-edged sword. Such rate cut usually followed by lower rate for deposited funds in commercial and investment banks, as well as slipping bond yields. The situation might hit rich countries within Eurozone, such as Germany.
  3. Many thought that ECB indirectly promised more stimulus to come. The expectation for more stimulus predictably made the market exuberant.

Personally, we don't think that ECB strategies will win them any point in their fight against falling inflation rate. Additionally, some of the plans are actually fall too close to the trap of 'future trouble'.

Nevertheless, we won't see them in the short term. The programs are not expected to bear fruits so soon, and the impact on the economy (if any) are not estimated to be game-changer. In short, it is not yet the time for Eurozone recovery; inflation shall stay low and unemployment probably will remain high. On the other hand, we could hope for the Euro to be on bearish again in the near future, especially if ECB is to make significant announcement in the next meeting.

Uncertain US NFP, Uncertain USD

Other reason that could explain why EURUSD bounced is US job market uncertain condition. The latest ADP Non-farm Employment Change recorded lower from 215,000 to 176,000 and the number of people claiming jobless benefits (Jobless Claims) have moved higher. On the other hand, Jobless Claims on average actually have shown improved job market, and there has been signs of employment recovery on the last Non-Manufacture ISM.

Bloomberg forecasted that NFP report will show an increase of 215,000 jobs compared to 288,000 last month. Nevertheless, fundamental factors left some chinks where surprises might explode and push USD up or down. If we are to see drops from the previous unemployment rate (6.3%), then we could wih the data to strengthen USD. What's more, 10 years US Treasury Bond yields have bolted to 2.6%, and it might boost confidence on the greenback. But any surprises that shows lower number might sink the USD against other majors.

So, are you going to trade today? Good luck, and don't forget to put in a good money management.

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