European stocks rally Friday on the back of positive developments in Italy and Spain. Italy’s MIB leads gains, adding 2.5 per cent ahead of the coalition government formation, while in Spain, Rajoy lost out in the no-confidence vote and now investors cheer a new (pro-European) prime minister appointment. Investors in Europe are focused on domestic positive developments and mostly ignore US-EU trade spat for now. As such, Britain’s FTSE 100 adds 0.67 per cent to 7,729, France’s CAC 40 rallies by 1.37 per cent to 5,472, while German DAX 30 gains 1.23 per cent to 12,759. US stocks futures point to positive open for Wall Street after a strong US jobs report.
The greenback was on the offensive before the NFP employment report and has accelerated the ascent following the release. US May non-manufacturing payrolls came in at +223K vs. +190K expected. Unemployment rate unexpectedly declined to 3.8% from 3.9%, pointing to further labor market tightening. Moreover, average hourly earnings increased by 0.3% vs. 0.2% expected. This is a really perfect report with all major components were better than expected. These numbers highlight that the economy may be ready for a more aggressive Fed policy tightening and three more rate hikes this year. But the overall dollar reaction was rather muted, though the currency did continue to appreciate against major rivals. By the way, following the release, Fed’s Kashkari highlighted that wage growth is slowly rising but he would have expected better numbers.
EURUSD failed to break above the 1.17 threshold and resumed the downside move even before the release of strong US data. The euro gained some support amid positive developments in Italy and Spain, but it wasn’t enough to fuel a recovery as the dollar’s bullish trend persists, despite the recent corrective signals. Today’s employment report opens up the way for more “hawkish” comments by Fed officials down the road, which should support the buck and bring back expectations of four rate hikes this year. As such, the pair will likely to continue trading within the bearish trend, and the euro will remain attractive for selling rallies. The pair gained support in the 1.1650 recently and may partially recover as the dust settles.
GBPUSD briefly dipped below the key mobbing averages in the hourly charts, but quickly rebounded and returned in the positive territory, though the impetus doesn’t give any substantial bullish signals. The pair attempts to continue its recovery despite the dollar’s upside bias which is in part explained by rather strong UK data as May manufacturing PMI came in at 54.4 vs. 53.5 expected. The pound is also supported by reports that London will give Northern Ireland joint UK and European Union status so it could trade freely with both. From the technical point of view, the pair, which is flat on the week, still needs to regain the 20-DMA above 1.34. As long as the price remains below this area, the downside risks prevail. A daily and weekly close above 1.33 will be a good technical sign for sterling bulls.
USDJPY jumped to five-day highs around 109.70 recently, fuelled by spectacular US employment data. Besides, the pair remains bid as Treasury yields remain rather high, and the renewed trade tensions failed to trigger a sell-off in riskier assets, so the Japanese yen is not in demand for now. However, as technicals show, further ascent in the pair is unlikely as the price came close to the area of moving averages which represent local resistance levels. The 14- and 20-DMAs in the 109.80-109.90 area are barriers on the way to 110.00 and the 200-DMA at 110.16. These levels look rater hard to break at one go, so we will hardly see the dollar move above 110.00 in the short term.
Brent crude resumes its downside correction after a boring consolidation earlier in the day. The price is challenging the $77 level once again as it dived back under the 20- and 200-DMAs recently. The market fundamentals remain rater positive, with OPCE confirmed its further compliance with the pact. But the continued rise in the US shale production coupled with strong dollar serve as constrain for Brent. Technical indicators also point to the risk of a further retreat from long-term highs and limited upside potential in the market for now.