On Thursday, the key event for the financial markets may have been the turnaround in the European Central Bank's monetary policy. Consequently, this could have led to a strong appreciation of the euro. Today, in turn, the market will be waiting for key data from the US labor market.
Inflation in the Eurozone exceeded 5 percent, which may be why the ECB presented a stance of readiness to fight inflation, which the market perceived as the possibility of faster and larger interest rate increases than previously assumed.
Three interest rate hikes this year?
Current market consensus may indicate that a 40 or 50 bps hike could occur instead of a 20 bps hike in 2022. The first hike may occur in June, followed by subsequent hikes in September and December. However, even a 50 bps hike would mean that the deposit rate would barely return from -0.5%, to 0.0%.
The EUR/USD pair seemed to react to the higher probability of a hike with a huge increase, given the recent volatility. Even before the ECB press conference, the euro was at $1.1270 to touch $1.1470 this morning. On a weekly basis, the euro against the US dollar has only increased so quickly in March 2020. Today, however, the outcome of the last days trading may be influenced by the reading of data from the US labor market.
The forecast says: 150k, but it could be worse
The market consensus sees an increase of 150k new non-farm jobs in the US in January 2022, which would be the lowest reading since December 2020. Such a reading could be influenced by the omicron coronavirus variant. The chances of the data being much lower seem to be growing. The ADP report showed that private companies shed 301,000 jobs, and the White House warned that the data could be very weak because the peak in omicron disease coincided with the payroll data collection period, according to Jared Bernstein, a member of Joe Biden's Council of Economic Advisers.
Even if the reading would be surprisingly negative, it may only be temporary. The U.S. labor market would probably rebound in the coming months. Indeed, the effects of the omicron appear to be less severe than initially anticipated and are beginning to fade, while labor demand remains strong. In addition to the employment change data itself, the release of wage growth in the context of a possible wage-price spiral also seems important. The data will be published today at 14:30.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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