Forex Traders to Look Past European Data as Non Farm Payrolls Loom Ahead (Euro Open)

Forex traders are likely to look past the European economic calendar as most of the upcoming news likely to have already been priced into the market, eyeing a dour US Non Farm Payrolls report that is set to show the economy shed 525 thousand jobs in December. Overnight, Japan’s Leading Index fell to a decade low, suggesting the recession in the world’s second-largest economy deepening

Key Overnight Developments

• Japan’s Leading Index Falls to Lowest in 10 years
• Euro, British Pound Correct Lower Against US Dollar


Critical Levels

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The Euro continued to decline in overnight trading having found resistance just below 1.38 in early New York hours. Prices found near-term support at 1.3634, the 61.8% Fibonacci retracement of the intraday rally. The British Pound consolidated in a narrowing wedge around the 1.52 mark overnight after retracing as low as 1.5121 from the New York session high at 1.5373.


Asia Session Highlights

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Preliminary estimates of Japan’s Leading Index saw the measure fall to 81.5 in November, the lowest in a decade. The index is a composite of 12 economic indicators including manufacturing orders and stock prices and is intended to foreshadow the direction of the broad economy in the following 6 - 9 months. The measure declined -3.7% from the preceding month, suggesting the recession in the world’s second-largest economy deepening. Indeed, recent data has shown record high unemployment and rapidly shrinking consumer spending. The slower pace of economic activity has brought inflation down significantly, giving the Bank of Japan room to maneuver as they attempt aggressive new measures that look beyond lowering the already near-zero benchmark interest rate.


Euro Session: What to Expect

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German Retail Sales are expected to add 0.5% in December to lift the annualized growth rate from negative territory to 0.0%. The meager improvement is foreshadowed by a better-than-expected Retail PMI survey: the reading rose to 42.3 in December from 41.3 in the preceding month as stores saw a shallow uptick in activity around the holiday season. Importantly, the boost to sales failed to bring retail sector sentiment out of contractionary territory (a reading below 50 means pessimists outnumber optimists surveyed for the PMI) because it was achieved through sharp price discounts, eating away at firms’ operating margins. On balance, this likely means more job cuts as retailers cut capacity after spending falls back to pre-holiday levels. Earlier this week, unemployment grew more than expected and is likely to continue to expand as both domestic and overseas demand is dwarfed by the spreading global slowdown. This will weigh on disposable incomes and spur precautionary saving, suggesting traders are unlikely to see much follow-through to December’s improvement. The broader Euro Zone Retail Sales are expected to print down -1.7% in the year to December, the fifth consecutive month of decline. Deepening recession saw initial estimates of December’s CPI print lower than expected earlier this week, suggesting the European Central Bank is likely to continue to slash borrowing costs. Traders are currently pricing in a 25-50 basis point interest rate cut when the ECB announces policy next week.

In the UK, Producer Prices are set to shrink -0.6% in December to bring annualized wholesale inflation to 4.0%, the lowest in 14 months. The result hints at continued decline in consumer price growth (the benchmark inflation gauge) as firms pass on falling production costs by discounting finished items. Yesterday, the Bank of England cut interest rates by 50 basis points to 1.50%, the lowest since the bank’s creation in 1694. Although Mervyn King and company shied away from promising further easing, trading in overnight index swaps points to another 0.25% cut in February and bond yield forecast see rates falling as low 0.50% by the second quarter.

On balance, traders are likely to look past the European data docket, with most of the upcoming news likely to have already been priced into the market. The US Non Farm Payrolls release will dominate attention late into the session, with expectations saying the economy shed 525 thousand jobs in December. Traders have treated the health of the US economy as proxy for that of the globe at large, betting that a recovery for the world’s largest consumer market will offer positive spillover elsewhere.


To contact Ilya regarding this or other articles he has authored, please email him at ispivak at dailyfx dot com.