The European markets started the day on a positive note, though the bullishness is restrained by some concerns around the ongoing US-China trade talks. Mixed corporate results add to cautiousness as well. The European bank sector is the outsider on Friday, with shares of French banking giants Societe Generale and BNP Paribas slipped after the financial reports. Meanwhile, gains in the tech and basic materials sectors compensate for a decline in financials. While US Treasury Secretary Steven Mnuchin said yesterday the trade talks in Beijing are going well, China signaled today “major differences” in negotiations. Besides, the US delegation has presented Chinese officials with a number of demands needed for reducing the trade imbalance between the two countries. So, the environment around the talks remains rather stressful, which make investors nervous. FTSE 100 adds 0.42 per cent to 7,533, France’s CAC 40 loses 0.13 per cent to 5,494, while German’s DAX 30 is up 0.34 per cent to 12,733. Meanwhile, Wall Street futures point to lower open after a mixed US jobs report.
The US economy created 164K jobs last month, down from the prior surveys at 189K and 135K in March – the figure was revised higher from 103K. The unemployment rate dropped to +3.9 for the first time since 2000 vs +4.0% expected. Meanwhile, average hourly earnings came out at +0.1% m/m and +2.6% y/y, missing forecasts at +0.2% and 2.7%, respectively. However, the greenback shrugged off soft wage growth and jumped to fresh highs against the major currencies. The market reaction shows that traders still believe the Fed will hike in June, and the central bank doesn’t need a striking earnings growth to proceed with monetary policy tightening. Interestingly, back in 2000, when jobless rate was this low, wages were rising 4.3%. So, the market seems to believe that a tighter labor market will help to spur wages growth down the road.
Following the release, the EURUSD dipped to 2018 lows just above the 1.19 threshold. Apart from dollar demand resurgence, the downbeat sentiment around the single currency was formed earlier by another portion of disappointing economic data from the eurozone. In particular, March retail sales rose just 0.8% vs. 1.9% expected, while the final print of the services PMI came at 54.7 in April, down from a flash figure of 55.0. The more dismal numbers we receive, the more gloomy traders become about the prospects of winding down stimulus by the ECB. The pair fails to regain the 200-DMA for a third day in a row, which signals the increasing downside risks from the technical point of view. A drop below the 1.19 support will open the way down to the 1.1870-1.1860 area. In the short-term, however, a mild bullish correction is possible.
GBPUSD slipped to fresh January lows amid a widespread dollar rally after the NFP report. The pair quickly tested levels below the 1.35 mark and is now trying to regain this figure in order to avoid further losses. The pound remains depressed amid the declining expectations over a May rate hike by the BoE. Against this backdrop, compounded by stronger dollar, the British currency fails to gain support from the political arena. Meanwhile, Prime Minister Theresa May’s Conservative Party avoided a wipeout in London local elections. The results show May has a good public support and it’s a bullish sign for the pound. But this issue seems to be in the background for now. Despite the oversold levels, GBPUSD still may continue to suffer losses as the rate hike on May 10 was almost completely priced in and now, the traders desperately unwind GBP longs built earlier.
Meanwhile, crude oil prices remain in limbo. Brent consolidates below the $74 mark as the bulls don’t have any meaningful impetus to push the barrel to recent tops. There are some doubts in the market that Trump will reimpose sanctions against Tehran on May 12 as the US President is too busy with other internal and geopolitical issues, including trade disputes with China. But the chances that Trump will leave the nuclear deal are still high overall and this continues to support the market. Brent is trading unchanged on the day and on the week as well, ahead of a fresh weekly Baker Hughes report. Should the data show the drilling activity increased further this week, the prices will sink in the “red”. The immediate support still comes at $73,60.
Nathan Lambert, Head of Global FX Analytical Departament