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The US payrolls data and central bank action have weighed on global growth expectations, which have led to a sharp decline in risk sentiment as we reach the end of the week in Europe. EURUSD is back at fresh 2-year lows and touched 1.2266 earlier, while AUDUSD is back below 1.02 and USDJPY has backed away from 80.00.
The chief driver of the sell off today was the US payrolls data. Here is how we see it. 80K is a lacklustre number. It's not bad enough to warrant more Fed action (at least not yet, anyway) and it's not good enough to spark hope of a summer recovery. The Fed doesn't seem that keen on QE anyway, and the bar is fairly high to get them to do more as we know the Committee is split on whether to add more stimuli to the economy. The Fed may have revised its growth forecasts lower at its meeting in June, but it's not willing to step in and offer some help to boost growth for the rest of the year.
This is bad news for stocks and commodities along with risky FX. The markets are now in an adjustment phase where they fall to a level that is better suited to an environment of lots of debt, not much growth and not much official support. Even those banks that are actively loosening monetary policy like the ECB, aren't giving the markets what they want. For example, the ECB may have cut the deposit rate to 0% (the rate it pays banks who leave money with it) but that hasn't done anything to halt the rise in Spanish bond yields, which closed the week perilously close to 7% - sovereign bailout territory. More effective perhaps, could have been re-starting its SMP programme.
Our week ahead is available here with a more in-depth look at what to expect next week: http://www.forex.com/uk/post?SDN=e5d42782-372c-4bd1-9b86-eb2be1757574&Pa=5b9e00f7-1868-4c89-a976-4ce50f9d8e4c
Obviously markets don't tend to fall in a straight line, so Monday could attract some bargain hunters and EURUSD. But for now at least, the sentiment in the markets look weak and there may be further dollar strength to come.
Here are a couple of charts I am looking at as the week draws to a close:
EURUSD: weekly chart
Now that we are below the June low at 1.2280, surely a move towards 1.20 and maybe even 1.18 is on the cards? It certainly looks like it from a fundamental perspective; however, the decline may not be even as short positions are already stretched. Thus, we think any pullback to 1.2320 then to 1.24 will be used to sell into next week.
With signs the carry trade is back on, a weekly close below 1.2050 is constructive for further weakness in this pair. Although there may be some profit taking on Monday, we would look to sell on any move back to 1.2100 - the 55-hour moving average. And target 1.20 then 1.19.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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