Market Anticipates Volatility in the Wake of US Unemployment Data

Volatility is expected in the forex market ahead of a week full of important economic data releases from the world’s major economies.  The trading week has started well with positive manufacturing PMI data in China showing improved economic activity, meanwhile interest rate announcements are scheduled for the UK, Eurozone and Australia, and the market is eagerly awaiting Friday’s US Non-Farm Payrolls (NFP) data release, the most critical indicator of the health of the US economy.

There was some disappointment in the market last week with the latest US Consumer Confidence data registering a decrease from 72.4 to 70.4, in contrast to a forecast improvement of 72.9.   This surprise announcement signaled that US consumers still do not have confidence in the economic situation and contributed to a weakening of the USD against the EUR, GBP and CHF.

The market is now looking for reassurance from the numerous data announcements scheduled for this week, with the NFP number expected to come in around 184,000, slightly weaker than October’s figure of 204,000, meanwhile the unemployment rate is forecast at 7.2% against 7.3% last month.  The USD is expected to behave bearishly in this scenario, especially because Federal Reserve Chairman Bernanke has continuously stated that he wants to see the unemployment rate drop below 7% before he will consider tapering the $85 billion asset purchasing program.  However, any slight improvement in the jobs data may see bullish activity from the USD and signal the beginning of tapering as early as this month.

The EURUSD had a good end to last week, boosted by a decrease in the EU’s unemployment rate from 12.2% to 12.1% and a positive Consumer Price Index reading for November, strengthening the pair to reach the monthly maximum of 1.3621, with stays above 1.3600 being supported by the ex-resistance of 1.3570. The main Eurozone focus this week will be the interest rate decision announcement on Thursday and the associated press conference with ECB President Mario Draghi.  Draghi is not expected to make any change to interest rates, especially following last month’s shock decision to cut rates from 0.5% to 0.25%, but high volatility in the euro is possible during the press conference as traders look to Draghi’s comments for indicators as to the future direction of the eurozone’s monetary policy.   Last week, EURUSD managed to overcome the resistance of 1.3570, which will now serve as a support for this week.  The next resistance levels are at 1.3620 (the high of last week) and 1.3670, while the supports are 1.3570, 1.3510 and 1.3480.

The UK economy continues to show positive signs of growth and last week we saw GBP/USD strengthen to 1.6383, its highest value since September 2011.  PMI data for Manufacturing, Construction and Services are all due to be released this week with the Services PMI on Wednesday being the most eagerly anticipated as it is considered a key driver of the economy.  Should this also be a stronger than forecast figure, the pound may strengthen further.  Support levels can be found at 1.6364, 1.6270 and 1.6220, with resistance levels at 1.6450, 1.6470 and 1.6500.  The latest interest rate decision from the Bank of England is also due on Thursday with no change to interest rates expected.  However, if Governor Mark Carney does announce a surprise rise in interest rates this would likely cause substantial volatility in the market and boost GBP higher.

In contrast, the Japanese yen has been struggling recently with foreign investment in Japan’s stocks almost halving from 1,295 billion yen to 707.5 billion, signaling a huge outflow of money from the Japanese economy.  Alongside static consumer and unemployment data, the yen is continuing to weaken, losing positions against all of the majors last week.  USD/JPY closed at 102.4, adding more than 100 pips during the week.  EUR/JPY stopped at 139.18, significantly higher than the previous week of 137.25 and GBP/JPY also jumped and finished the week at 167.56.  The pivot point for USD/JPY is 102.41 and the first resistance at 102.86.  It is a slow news week for Japan, with the main focus likely to be Bank of Japan Governor Kuroda’s speech about the nation’s monetary policy scheduled for Saturday 7 December.

The Australian dollar has provided traders with some fresh volatility of late, falling in the first half of last week in reaction to disappointing new home sales data, before recovering to close on Friday at 0.9108 – still losing about 60 pips against the previous week’s closure.  Despite this weakness, no change to interest rates is expected on Tuesday as Reserve Bank of Australia policy makers are keen to see the currency depreciate further to boost foreign investment.  The positive economic news from China will likely also be good news for the Aussie dollar, with the Australian economy closely linked to the fortunes of its Asian trading partner, however this week’s GDP announcement on Wednesday is expected to be lower than previous readings which could weaken AUD once again.  AUD/USD is currently trading around 0.9135 with the first resistance point at 0.9114.

All of the USD majors should be closely monitored this week for likely volatility surrounding unemployment data releases, with EUR/USD remaining the primary focus.  If the NFP is lower than expected it is likely we will see weakness in the USD and may see last week’s highs for EUR/USD surpassed.