Market Overview

Markets are performing with a mixed sentiment as they head towards the Non-Farm Payrolls report which will be released this afternoon. The European Central Bank (ECB) has left behind all optimistic expectations as it has expanded its Pandemic emergency purchase program (PEPP) by 600 billion Euros to a magnificent amount of 1.35 billion until the end of 2021.

On the other hand, unexpected rising payrolls have undermined the positive sentiment ahead of the Non-Farm Payrolls report.

This led European indexes to decline in early morning hours today with the German DAX index losing 0.45% and the British FTSE 100 index by 0.64%. However, the sentiment changed in the afternoon as the DAX index reversed with gains by more than two %, the FTSE 100 index is climbing with above 1.2%.

The US indexes were more reluctant to the unexpected worsening of unemployment data in the US, posting a symbolic gain in the Dow Jones index of 0.5%. The S&P500 index and the Nasdaq index failed to present positive closing on Thursday, slipping by 0.34% and 0.69% respectively. However, the trading session in Asia inbreathed the positive note to markets as the Hang Seng index rose by 1.66%, yields of major government bonds were rising, flagging European stock markets to extend their gains at least until the US unemployment data is released.

The ECB decisions concerning the expansion of its PEPP program led to a surprising  reaction of the Euro that soared almost to the 1.14 mark against the Greenback. ECB was dovish in an atypical fashion. European central bankers had few choices to support the stalling EU economy where the Gross Domestic Product (GDP) fell by 3.8% in the Q1, 2020 even before the real start of the pandemic. European inflation in May plummeted to 0.1% from 1.4% in January with a ECB’s target for inflation of close to 2%.

The Euro broke through all strong resistance levels in the area of 1.1134-1.1370 and is rising for the eight consecutive day. Investors consider the ECB’s move concerning its PEPP program rather a long-term support of the economy and as a tool to iron out the peak of the pandemic crisis than another injection of liquidity that could undermine the strengthening of the European currency.

Lockdowns and falling demand have led to a lack of sufficient funds for European governments to cover rising expenses, the impairment of government bonds, and to the sustainability of their budgets and ability to tackle the slowdown being undermined. In this regard ECB does not provide liquidity but enables budget stimulus which was lagging behind. The market considers such measures as a tool for the revival of the European economy and this is what has supported the European currency.

The US Dollar now steps forward as a major component of the EUR/USD exchange rate. The Greenback has to reclaim its role as a strong safe-haven asset with positive Non-Farm Payrolls data. The positive PMI indications and ADP calculations are no longer enough to establish a rebound against the Euro. The straightening of the Dollar may reemerge only with the strong economic fundamentals. Statistical modeling shows that it is possible. The most likely NFP data for May might be recorded within the range of – 3,000,000 to 6,000,000 closer to 4,900,000 but well above pessimistic the forecast of 8,000,000. The same might be true for the unemployment rate that is likely to be in the range between 16% to 17.5%, which is better than forecasted at 19.8%. However, it is crucial to understand that even if this statistical modeling is confirmed, the Greenback correction may take some time. The positive NFP data may reverse the Euro rally, but if the actual released figures  fail to meet the positive expectations, this may send the Euro to the 2020 highs above 1.15. In case of strong NFP indicators, a correction to 1.1260 may well become a short-term scenario.

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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.