The US jobs report was a pretty mixed bag on Friday, but in the end left traders with the feeling that further support for the US economy through QE3, is still very much a possibility in the months to come, leaving risk appetite in buoyant mood going into the weekend. The NFP data at +163K was much better than the expected +100k, although the June reading was revised back from 80K to 64K and the overall Unemployment rate rose to 8.3%.
With the market also taking a second look at Mario Draghi's statement of the previous day, it collectively decided that the cavalry will eventually come to the assistance of the EU, but possibly not as soon as hoped, and so Euro shorts were covered, with the move accelerating once the US data was released .
Having hinted that the ECB may start buying government bonds to reduce the borrowing costs of Spain and Italy amongst others, bonds of both nations had a pretty wild ride on Friday, with the 10 years initially reaching 7.35% (Spain) and 6.22% (Italy) in the early gloom of the session, before turning sharply and closing at 6.82% and 5.98% respectively. Equity markets also liked what they saw and the DAX rallied +3.93%, EStoxx50 +4.8%, while in the US, the S+P closed +1.9%.
Also helping the Euro on Friday was the June services PMI data which came in at 47.9; a 4 month high and above the expectation of 47.6.
All in all it was a pretty choppy, event driven week for the Euro. Next week too has plenty of economic events, albeit of not quite the same magnitude and hopefully the trade will be driven a little more by supply and demand, although statements from the EU are bound to provide the odd surprise move. Spain in particular looks as though it will be the focus, as it would appear that the government is not so far away now from seeking a full sovereign bailout from the EU. How this could be bullish for the Euro or the equity markets in the long term is beyond me, but the market seems to be lining itself up for a relief rally, just on the basis that Spain has finally admitted that there is no other option. Wait and see on that one.
The immediate momentum points to higher ground, although the sellers in the 1.2400/40 do need to be overcome. 1.2405 is last weeks high and then 1.2438 is 61.8% of 1.2690/1.2042 (as well as what could be the neckline of ta reverse head/shoulder formation - see chart). If we do manage to creep above here, then the move should start to accelerate towards 1.2510 (38.2% of 1.3282/1.2042). Beyond this, the 50% pivot is at 1.2656. With the dailies looking as though they have some increasing momentum behind them, an early rally would not surprise, although for the time being I suspect 1.2500 or thereabouts, if seen, would probably cap it.
On the downside, there is now short term support at 1.2360 and more substantial buyers should be found at 1.2285. Given the way that the currencies have been spiking in both directions recently, do not discount some sharp setbacks, although the overall strategy does appear to be one of looking for dips to buy into.
This week's highlights will include:
M: Sentix EU Investor Confidence
T: German 10s Bond Auction, Factory orders
W: German C/A, Trade Balance, IP.
T: China CPI, ECB Monthly Report, US Jobless Claims 30 Yr Bond Auction
F: EU CPI.
