Friday, September 4, 2020

Increasing risks limits the EUR/USD’s upside in the long-term while today’s labour market report in the US may put some downward pressure on the currency pair

  • Dollar
  • Euro
  • US payrolls


Analysts’ Pick: Increasing risks limits the EUR/USD’s upside in the long-term while today’s labour market report in the US may put some downward pressure on the currency pair

  • EUR/USD may have some downside on today’s jobs report from the BLS as it is likely to suggest continued weakness in the US labour market
  • NonFarm payrolls will probably show another increase in jobs for August, but this figure will be exaggerated by an estimated 240,000 temporary jobs being added for the 2020 Census
  • Unemployment data in the US is likely to decline below 10% but this number is likely to undershoot actual layoffs due to the pandemic since participation rates suggests a spike in people leaving the workforce
  • Political risk in our view will limit the euro’s upside as with the 750-billion-euro stimulus plan looking to face more delays and Brexit negotiations showing little progress
  • Resurgence in Covid-19 cases in Spain and France and to a lesser extent, Germany, Italy and Netherlands will likely put pressure on economic activity in the bloc as well
  • In the medium-term the euro may see some upside after today’s possible drawdown but is unlikely to have much more upside potential in the longer-term

A stronger dollar looks likely to hold up in today's trading session as we are looking at what is likely to be another step up in terms of risk aversion away from the equities market. But in the medium-term, movements in EUR/USD suggests that there may be some upside for the currency pair, while in the longer-term we don't expect strong movements in the euro-dollar due to increasing risks surrounding the Euro-area and high levels of uncertainty for the greenback.

A distorted payroll report from the US Bureau of Labor Statistics (BLS) is likely to continue to show continued weakness in the labour market's growth as seasonal adjustments coupled with slowing rehires put downward pressure on the headline figure. This is due to the usual end of the summer holidays and the restarting of the school semester in August which usually causes an uptick in hiring. But with the onset of the pandemic and schools delaying reopen with some opting to shift to fully online classes would mean that less workers will be needed on campuses. Also, unemployment insurance claims showed that hiring continued to stagnate while at the same time, initial claims was flattening out at around 1 million per week, a signal that layoffs remains at elevated levels despite easing from the initial spike earlier this year. That said, an estimated 240,000 temporary jobs that was added by the government for the 2020 Census will likely support the headline figure from falling too far below that of July's.

Both initial and continuing claims declined at a slower pace in August


Consequently, we expect the BLS' report to show an increase of around 1 million payrolls or lower for the month of August, which puts our estimate at the lower end of the range of estimates from economists of -100,000 to +2,400,000 with a median estimate of an 1,350,000 increase. This figure, when summed up with that from May to July will imply that around 46% of people that were laid off during March and April has re-joined the workforce, suggesting that unemployment rate would inch lower again to below 10%. Important to note that unemployment rate also conceals the large outflow of people in the workforce, likely due to either discouragements in job seeking or possibly transitioning to stay-at-home roles within the households to better care for kids since the closure of schools.

Unemployment rate may drop below 10% but it’s probably distorted by low participation rates


While the EU was attractive in comparison to the dollar before, we view that there is little upside at this point as a result of inherent risks that the bloc faces in a wide variety of categories. The euro hasn't fared much better against dollar when compared to other G10 currencies during the month of August, gaining only against the safe haven currencies as a result of the overall bullish sentiment that we saw in the US equities market during the month. The aforementioned risks include: a spike in Covid-19 cases that we are currently seeing play out, political risk stemming from the need for the 750-billion-euro stimulus bill being approved from the bloc's parliaments as well as Brexit, an uncertainty on future trade relations with the US thanks to the upcoming US elections.

EUR Cross August % Chg
EUR/GBP -0.82%
EUR/AUD -1.86%
EUR/NZD -0.23%
EUR/JPY +1.33%
EUR/CHF +0.27%
EUR/SEK -0.19%
EUR/NOK -2.86%
EUR/CAD -1.41%
*Source: Bloomberg

We have already been seeing some worrying numbers in terms of Covid-19 cases in major EU countries. Back at the end of July we anticipated in our report on EUR/GBP that there would be an uptick in cases in France as its rate of positives were worrying despite having a low rate of testing. Currently, that scenario is being played out, with France seeing daily Covid-19 cases close to that seen in March and April. In addition, Spain and the Netherlands are also experiencing a sustained uptick in Covid-19 cases either close to or above the pace seen back in March and April, while Germany and Italy are experiencing an uptick but at a much lower rate than before.

Data shows France and Spain rate of new infections rising past that of March and April


The 750-billion-euro stimulus package may have passed EU leaders, but more obstacles lie ahead before its actual implementation. News came out this week suggesting that Hungary's parliament may not be agreeable the stimulus fund until it gets reassurances that it won't risk punishment over its sliding democratic standards. While the report only cited an unnamed EU diplomat familiar with the matter, it does highlight the additional hurdles that the agreed plan must go through before being finally implemented. This includes the ratification of the plan by national parliaments, as well as the EU Parliament. In addition to that, Brexit remains a key risk for the currency moving forward as we approach the EU's October summit and the Brexit negotiations deadline at the end of the year. EU Chief Negotiator Michel Barnier has already expressed disappointment in regards to the ongoing negotiations with the UK, which seems to be logical since Brexit is likely not the main focus for the UK at this point of time with the country fighting against the pandemic and an impending large-scale layoff with the furlough program coming to an end in October as well. Finally, the US elections remains an unpredictable event, as seen from the last presidential elections. While markets may be busy pricing in a Joe Biden presidential candidacy, we expect the odds between Donald Trump and Biden – and consequently the markets’ pricing - to narrow moving forward to the elections, which should prevent the euro from any strong swings since the outlook for trade relations between the EU and US remains dependent on the winner.

As a result, today may see some downward pressure on EUR/USD possibly to around 1.1811 with an expected lower limit of 1.1799 as NonFarm payrolls may increase the already high levels of pressure on US equities seen yesterday which subsequently should spill over across financial assets. Over the medium-term there may be some upside potential as the currency pair maintains a trading range within an upward trend channel. But in the longer-term, we don't expect a strong upside due to the amount of risks against the European region, while downside remains curbed as well, by a US economy that in reality is weaker than it appears to be.

Technical Analysis:


The overall picture for EUR/USD remains tilted to the upside. But with US unemployment data coming in later today, we expect more volatility in financial markets which may be in favour of the greenback. However, while there may be a dip in the dollar, there appears to be a strong case for only a limited impact since the RSI has not gone below 33 since May. Hence, we view the downside today to be limited at or around the 1.1799 level before traders re-enter with bullish positions on the euro due to the strong support at that level, which should result in limited downside for the currency pair.

Support: 1.1799 / 1.1706 / 1.1625

Resistance: 1.1899 / 1,1951 / 1.2023

EUR/USD Chart (H4)