The EUR/USD is Waiting on European Yield to Move Higher

FX:EURUSD   Euro / US-Dollar
The EUR/USD currency pair is consolidating at higher levels waiting for an impetus to drive the exchange rate higher. Friday’s softer than expected U.S. employment report, in tandem with Europe’s stronger than expected PMI and Retail Sales data, could be those catalysts. Yields in Europe have been on the rise and have been outpacing U.S. yields, but it’s a breakdown of the yield differential between Europe and U.S. that will likely be the catalyst that allows the Euro to break higher.

Friday’s Data was Weaker than Expected

Jobs Friday is always and exciting day, but Today’s softer than expected payroll report, was deflating and could weigh on the dollar. The U.S. Department of Labor reported that U.S. non-farm payrolls increased by 148K in December, missing expectations of a rise of 190K. This runs counter to the strong gains seen when ADP reported its private payroll report on Thursday. The unemployment rate remained unchanged at 4.1%, as the labor force edged up 64K. The number of individuals that decided to look for a job as a percentage remained unchanged at 62.7%. Wages increased 0.3%, higher than the prior month, but the number of hours worked was unchanged.

In the aftermath of the report, the EUR/USD was stable, as there appeared to be no change in the markets view of future rate hikes despite the soft headline. Fed funds futures were fractionally firmer. The mix signals conveyed by the December employment report continues to support forecasts for a 25-basis point Fed rate hike at the March 20, 21 FOMC meeting. While the 148K headline was light the 0.3% increase in wages offset this dovish news.

German retail sales beat Consensus

German retail sales came in stronger than expected rising 2.3% in November on a month over month basis, rising from -1% in the prior month. This left the year over year rate up 4.4%. When combined with recent strong economic data points released earlier in the week, it appears that European growth is accelerating.

Stubbornly High Yield Differential Capps the Euros Climb

The European debt market is beginning to price in the end of the ECB’s quantitative easing program which is putting upward pressure on the Euro , and downward pressure on the yield differential. While it appears that the EUR/USD is breaking out, the 10-year yield differential remains elevated as Bunds have only recently underperformed treasuries. The weekly chart of the yield differential with the EUR/USD as an overlay shows that these assets tend to move in opposite directions over the long-term. The long-term correlation is negative (below the zero line), which means the two assets do not move in tandem. A breakdown in the yield differential, will likely be the catalyst that drives the EUR/USD higher.

The technicals on the EUR/USD show that prices have taken out the November highs at 1.1962 and is consolidating below resistance near 1.2092. The exchange rate earlier in the week was overbought with the RSI printing a reading above 70, but the EUR/USD recently consolidating has allowed the RSI to move back below 70, currently printing a reading of 63, which is in the middle of the neutral range and points to decelerating positive momentum. Look for a break of 1.21 to lead to target resistance at 1.40.
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