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Bullish EUR/USD Formation Vulnerable to Strong U.S. NFP Report

Bullish EUR/USD Formation Vulnerable to Strong U.S. NFP Report

2015-06-05 08:00:00
David Song, Shuyang Ren,
Share:

- U.S. Non-Farm Payrolls (NFP) to Expand 200+K for Second Straight Month.

- Unemployment Rate to Hold at Annualized 5.4%- Lowest Since 2008.

For more updates, sign up for David's e-mail distribution list.

Trading the News: U.S. Non-Farm Payrolls

Another 225K expansion in U.S. Non-Farm Payrolls (NFP) may boost the appeal of the greenback and trigger a near-term decline in EUR/USD as signs of a stronger economic recovery fuels expectations for higher borrowing-costs in the world’s largest economy.

What’s Expected:

EUR/USD NFP

Click Here for the DailyFX Calendar

Why Is This Event Important:

A further improvement in the labor market may put increased pressure on the Federal Open Market Committee (FOMC) to remove the zero-interest rate policy (ZIRP) sooner rather than later, but the ongoing slack in the real economy may encourage the central bank to push back its normalization cycle in an effort to stem the downside risks surrounding the region.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

ISM Manufacturing (MAY)

52.0

52.8

Housing Starts (APR)

9.6%

20.2%

NFIB Small Business Optimism (APR)

96.0

96..9

Improved confidence paired with the pickup in production may generate a strong NFP print, and a marked expansion in job growth may drive a near-term rally in the dollar as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Factory Orders (APR)

-0.1%

-0.4%

Personal Spending (APR)

0.2%

0.0%

Advance Retail Sales (MoM) (APR)

0.2%

0.0%

However, the ongoing weakness in private-sector consumption may encourage U.S. firms to scale back on hiring, and a dismal batch of data may undermine the near-term outlook for the reserve currency as it gives the Fed greater scope to retain the highly accommodative policy stance for an extended period.

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How To Trade This Event Risk(Video)

Bullish USD Trade: U.S. Non-Farm Payrolls (NFP) Report Exceeds Market Forecast

  • Need red, five-minute candle following the NFP print to consider a short trade on EUR/USD
  • If market reaction favors a bullish dollar trade, sell EUR/USD with two separate position
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit

Bearish USD Trade: Employment/Wage Growth Disappoints

  • Need green, five-minute candle to favor a long EUR/USD trade
  • Implement same setup as the bullish dollar trade, just in reverse

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Long-term outlook for EUR/USD remains bearish, but the recent string of higher lows & highs in the exchange rate raises the risk for a further advance in the days ahead.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail FX crowd turning increasingly net-short EUR/USD as the ratio slips to -2.02.
  • Interim Resistance: 1.1465 (May high) to 1.1520 (61.8% expansion)
  • Interim Support: 1.0850 (78.6% expansion) to 1.0870 (38.2% retracement)

Read More:

AUD/USD Eyes Key Support on Record Trade Deficit- NFP in Focus

EURUSD Scalp Levels Heading Into ECB, NFP- Longs Favored Above 1.1065

Impact that the U.S. Non-Farm Payrolls report has had on EUR/USD during the previous month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR 2015

05/08/2015 12:30 GMT

228K

223K

-13

-53

April 2015 U.S. Non-Farm Payrolls

EUR/USD Chart

The U.S. labor market showed a more meaningful pickup in April as Non-Farm Payrolls (NFP) increased 223K after climbing a revised 85K the month prior, the slowest pace of growth since July 2012. At the same time, the unemployment rate slipped to an annualized 5.4% from 5.5% despite an uptick in participation rate, while Average Hourly Earnings climbed to 2.2% from 2.1% during the same period amid forecasts for 2.3% clip. The ongoing recovery in the labor market may encourage the Fed to raise the benchmark interest rate later this year, but we may see a growing number of central bank officials favor a further delay in the normalization cycle as the committee struggles to achieve the 2% target for inflation. The initial market reaction was short-lived as EURUSD quickly snapping back above the 1.1200 handle, with the pair consolidating throughout the North American session to end the day at 1.1208.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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