EUR/USD Pops As Nowotny Dismisses Deposit Rate Cut

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Market Drivers for May 3, 2013
Nowotny downplays deposit rate cut sending EURUSD higher
UK Services PMI beats
Nikkei -0.76% Europe -0.11%
Oil $93.68/bbl
Gold $1476/oz.

Europe and Asia:
AUD AiG Performance of Service Index 44.1 vs. 49.6
AUD PPI 0.3% vs. 0.2%
EUR Euro-Zone PPI -0.2%
GBP PMI Services 52.9 vs. 52.5

North America:
USD Unemployment Rate 8:30
USD Change in Non-farm Payrolls 8:30
USD Change in Private Payrolls 8:30
USD Average Hourly Earnings All Employees 8:30
USD Factory Orders 10:00
USD ISM Non-Manufacturing Composite 10:00

Euro rallied in early European morning trade today retaking the 1.3100 level after ECB member Ewald Nowotny downplayed the prospect of negative deposit rates in the foreseable future. Yesterday the EUR/USD fell sharply in the wake of comment by ECB President Mario Draghi who stated that the ECB was “technically ready” for deposit rates to turn negative. Such a move would cost banks to keep money on deposit with ECB and would therefore make it unattractive for investors to maintain their balance in euro pressuring the currency lower.

Mr, Draghi’s comments quickly turned sentiment against the EUR/USD and the pair spent most of the day yesterday near the lows at 1.3050. However, today Mr. Nowotny noted that “Markets have over-interpreted the discussion yesterday,” adding, “”Of course, this is one of many options. But it is not an option that is relevant in the near future … this is nothing that is of short-term relevance.”

His statement had in immediate impact on the EUR/USD triggering a sharp short covering rally as the pair climbed to 1.3135 by mid-morning European dealing. The EUR/USD short squeeze may continue into the day if the US NFP report proves weaker than expected. The market if forecasting 146K jobs, but if the number prints close to 100K the EUR/USD could rally right back to the 1.3200 level as late shorts scramble to cover.

Elsewhere the UK PMI Services report posted slightly better than expected numbers printing at 52.9 versus 52.5 eyed. This was the fastest pace of growth in 8 months and was the third consecutive UK data point this week to beat forecasts indicating that the UK economy may be more resilient than the consensus view. Cable jumped to 1.5550 on the news, but stalled there for rest of the morning as 1.5600 continues to cap the rally for now.

In North America today the NFP of course takes center stage and the view ahead of the release remains cautious. The pre-report indicators are mixed with ADP missing its forecast while jobless claims continue to show improvement. One of the better forecasters of the NFP – the employment component of ISM Services will not be released until after the report , leaving the market in the dark for now.

Given the string of disappointing US economic data over the past several weeks – all of it pointing to a slowdown in activity – a print at or near the forecast number of 150K may be seen as a relief by the market and could help propel USD/JPY back towards the 99.00 level. A big beat to the upside may even put the pair back on track towards the key 100.00 barrier which it has failed to cross many times over the past month due to deteriorating US fundamentals. A very weak print however, could trigger a sharp selloff in USD/JPY and test the key support at 97.00 which has stubbornly held all week long.

Boris Schlossberg
Managing Director

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