With the ECB still resigned to easy monetary policy, Friday’s US non-farm payroll report could further reinforce the divergent policies between the ECB and Fed, thus strongly pressuring EURUSD lower.
The US dollar (USD) was stronger in afternoon North American trade against both the euro (EUR) and Japanese yen (JPY) today after better-than-expected US economic data and a relatively dovish press conference by European Central Bank (ECB) President Mario Draghi.
In the US, the ISM manufacturing data printed at 55.4 versus 52.1 expected, markedly beating projections and hitting its best mark in more than two years. The sub-components of the report looked very strong as well, with employment increasing to 54.4 versus 48.7, while new orders rose to 58.3 versus 51.9. The data showed a huge improvement from the month prior and suggested that US economic activity may be starting to pick up after stalling in the first quarter.
Meanwhile, in Europe, ECB President Draghi stuck to his well-worn script and played down the nascent recovery in the Eurozone, emphasizing that rates are likely to remain low for a considerable period of time. The EURUSD saw little reaction from his remarks, dropping to 1.32 on an initial knee-jerk selloff, only to climb higher and then drift back towards 1.32 once again.
Although the euro has remained remarkably resilient as investors continue to remain enthusiastic about the turnaround in the region, the single currency is likely to have a harder time making further progress against the greenback if US data continues to surprise to the upside, putting enormous pressure on the Federal Reserve to taper asset purchases sooner rather than later.
The market is now primed for a strong non-farm payroll (NFP) report on Friday, and there is a risk of disappointment for dollar bulls if the number prints at 175K or less. In the meantime, currencies are likely to remain quiet until we get the final and most important economic event of the week.
By Boris Schlossberg of BK Asset Management
