If there is one rule for currency markets, it is that they are not a one-way street, something we saw yesterday and could well see again today with the release of the latest US employment report. The much anticipated ECB meeting saw Draghi deliver pretty much what was expected in terms of rate cuts and easing measures. Having been as much as one big figure lower, EURUSD more than recovered by the end of the day, with similar reversals seen on the EUR crosses. There were two principle reasons for this. The first is that whilst some are describing this as a ‘big bazooka’ of measures designed to combat the threat of deflation, the feeling is that they are unlikely to have much impact. See our blog “Too little too late?” for more on this. Secondly, it’s a fact of life that this is the way currency markets behave. You only have to look at the way the dollar reacted to the stronger than expected payrolls data, with the initial rally fully reversed two hours after the event.
It’s worth bearing this in mind as we head into the latest US employment report today. On the headline numbers, the market is looking for a moderation back to the 215k area, although the ADP release earlier in the week were indicative of something a little softer. There is a case to say the numbers matter less because the Fed seems very embedded on a USD 10 bln each meeting tapering pace. But the dollar could prove more receptive to stronger numbers vs. weaker ones, given that the dollar tone has been better of late and the market is keen to find reasons to justify dollar strength.