USD Shorts Squeezed After Solid NFP’s: Lasting Move, Or Blip In The Trend?

USD Shorts Squeezed After Solid NFP’s: Lasting Move, Or Blip In The Trend?

Talking Points:

- This morning’s NFP report came in rather solid all-the-way-around, leading to a move of USD-strength against most major currencies.

- The reaction, at least so far, has been asymmetric as we outline below. For traders looking to buy dips in EUR/USD, we may be nearing an interesting support level to investigate such a strategy.

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This morning’s Non-Farm Payrolls report out of the United States came-in rather solid all-the-way-around. The headline number of +209k jobs added to Non-Farm, American payrolls in the month of July beat the expectation of +180k. The unemployment rate fell by 10 basis points to 4.3% from a prior read of 4.4%. Average hourly earnings, a key marker for wage inflation increased by 2.5%; which while historically low, is still rather attractive given the current backdrop of lackluster inflation in the United States. Labor force participation increased to 62.9% from a prior 62.8%, and even underemployment numbers came-in without any warts, as the 8.6% read was unchanged from last month.

All in all – a fairly solid report. While this may not signal significant growth, it does show some element of stability, particularly on the pain points of inflation and labor force participation. The bigger question is whether this will be enough to substantiate a run of strength in the U.S. Dollar after a brutal 2017 has seen more than 10% eviscerated from USD’s value.

As we discussed in this week’s trading forecast for USD – expectations are cyclical like many other market factors. After the robust run in the Dollar on the back of the ‘reflation trade’ after last year’s Presidential election, expectations ran-higher for U.S. growth to continue. But data so far has been unable to keep pace with those elevated expectations, and this combined with a Federal Reserve shifting their focus to the balance sheet has contributed to an extended run of weakness in the Greenback. As data continues to disappoint, prices move lower along with expectations for future data prints. Eventually the bar gets lowered so-far that it be rather simple for data to beat those diminished expectations, and this morning’s NFP print produced a quick burst of strength in USD as an oversold market got squeezed as data came-in a bit stronger than what markets were looking for.

Below, we look at the U.S. Dollar against three major currencies. The reactions that we saw this morning can help to show where traders may want to direct future exposure around USD, either long or short.

EUR/USD

The Euro has been a runaway freight train of recent as markets attempt to get in front of what feels like an inevitable exit from stimulus at the ECB. Up to this point, the European Central Bank have disclosed zero details about actually exiting stimulus, so much of what we have seen is speculation based on an improvement in data that many believe will eventually spell and end to ECB QE. Combine this with weakening of U.S. data throughout the year combined with the Fed’s ‘pivot’ to balance sheet reduction, and we have a very robust topside move in EUR/USD so far in 2017.

This has been one of the more interesting short-USD setups throughout the year, and this morning’s reaction in EUR/USD highlighted that theme as prices moved-down to prior support, but so far, have remained supported above this week’s low. This will likely remain one of the more attractive short-USD themes as we approach the ECB’s pivotal meeting in September.

EUR/USD Hourly: Price Action remains above this week’s low post-NFP

USD Shorts Squeezed after Solid NFP's: Lasting Move, or Blip in the Trend?

Chart prepared by James Stanley

GBP/USD

Yesterday saw the Bank of England take a rather dovish outlay at the bank’s Super Thursday batch of announcements. But sometimes it’s not what you say as much as how you say it; as the meeting minutes contained a rather clear warning that rate hikes may be on the horizon. But given the profound dovishness of BoE Governor, Mark Carney, combined with the reduction in growth forecasts as concerns around Brexit continue to populate the BoE’s expectations; and the takeaway was that the BoE remains dovish for the immediate future, even with the rising inflation that’s showing in the U.K. economy.

In GBP/USD, we can see a bit of additional USD-strength compared to what showed-up against the Euro. Prices moved-down to a key support level around 1.3108 in the immediate wake of this morning’s announcements, but sellers have yet to relent as price action broke below the 1.3100 level, and doesn’t yet appear done with this downside move. Deeper support around the 1.3008 handle could be interesting for bullish continuation plays, provided that support actually shows up around that level so that risk can be managed for bullish continuation approaches.

GBP/USD Hourly: Cable breaks-down to fresh weekly low post-NFP

USD Shorts Squeezed after Solid NFP's: Lasting Move, or Blip in the Trend?

Chart prepared by James Stanley

USD/JPY

After the jaw-dropping run of weakness in the Yen on the back of the reflation trade, the prospect of continued Yen-weakness looked very attractive as we came into the New Year. While growth expectations were driving expectations for inflation-higher in many economies around-the-globe, the prospect of higher prices remained rather subdued in Japan. This could allow the BoJ to remain rather dovish while Central Banks in Europe or the U.K. are forced to look at tighter policy options in response to stronger rates of inflation.

For much of the year, the Yen has been weak – just not as weak as the U.S. Dollar. If we look at EUR/JPY or AUD/JPY, both pairs remain near one year highs, while USD/JPY spent the first 3.5 months of the year trending-lower, only to build into a rather aggressive ~450 pip range over the past four months.

USD Shorts Squeezed after Solid NFP's: Lasting Move, or Blip in the Trend?

Chart prepared by James Stanley

As you can see on the right side of the chart, prices are currently bouncing off of the 50% Fibonacci retracement of the post-Election move in USD/JPY. This level around 109.90-110.00 has been an interesting element of support in the pair, and after this morning’s NFP beat brought a quick rush of strength into the Greenback, USD/JPY popped-higher to run into a trend-line projection of the most recent bearish move-lower.

For those that are looking to play a bullish move in USD, USD/JPY could remain as an attractive candidate for such. A bullish break of the below trend-line, followed by a top-side move through the zone of resistance through 111.61-111.96 could make such a theme look considerably more attractive.

USD/JPY Hourly: USD Strength Tests Descending Trend-Line in USD/JPY

USD Shorts Squeezed after Solid NFP's: Lasting Move, or Blip in the Trend?

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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