The EURUSD has pushed to a new record high in an aggressive rally that is looking to overtake the pair’s next, even milestone at 1.5300. Such an aggressive sell off stands in stark contrast to the price action in the overnight where the dollar was trying to slowly regain its footing. This effort was quickly overwhelmed with the onset of the New York session though, when economic data triggered fears suggesting employment would no longer support the vital consumer sector and contractions in the economy’s largest sectors confirmed the US was already heading into a recession.
US labor market data for the month of February has thus far sent mixed signals regarding this Friday’s non-farm payrolls report. First, the Challenger index of job cuts fell by 14.2 percent from a year ago, suggesting that companies are not reducing their workforces. However, it is worth noting that major components of the services sector (consumer goods, food, entertainment) all showed a jump in layoffs, while government/non-profit agencies showed an even greater surge. Meanwhile, the ADP employment report unexpectedly fell by 23,000 - the first negative reading since June 2003 - as the manufacturing and goods-producing sectors showed net job losses. While the services sector continues to add on workers, it is occuring at a far slower pace and does not bode well for the employment component of the ISM non-manufacturing index due out this morning at 10:00 EST, nor the NFP release on Friday.
In turn, a contraction in employment only adds to the bearish outlook for the US economy that is already teetering on the cliff of negative growth. Following up on the ISM manufacturing guage which reported the sharpest drop in factory activity in nearly four years, its service sector counterpart marked revealed a more concerning turn of events. According to the group’s proprietary survey, business among the service base (the largest sector in the US economy) held below the expansionary/contractionary 50.0 reading for a second month; but the indicator’s reading was a considerable improvement over the previous month and well above the market’s forecast. The 49.3 print was 2 points higher than the official forecast and was a 4.7 point improvement over January’s reading which was the worst reading since the 2001 recession. However, this month over month change is less important than the fact that this print marks the first case of a back to back contraction in the service sector since 2002. This adds serious weight to to speculation that the world’s largest economy is already in a recession; and we are just waiting for the government’s GDP reading to confirm it. From the summary breakdown of the ISM report, there was a number of improvements over the previous month’s reading, though many of those components were still contracting. A genuine improvement was noted in business activity and inventories. Production actually rebounded to 50.8 from the incredible 41.9 reading last month. This shift may explain the pickup in inventory and inventory sentiment over the same period - though cooling demand likely had its influence as well. Less impressive were the higher readings from new orders, backlogs and employment which were all still within contractionary territory. The unexpected drop in new export orders to 46.5 was a notable surprise. A cheaper dollar no doubt provided a discount to foreign consumers, but an overall cooling in demand seems to render this reasoning moot.
So, while the EURUSD showed some hesistation in surpassing yet another milestone in 1.5300, the fundamentals clearly leave the doors wide open to further deterioration in the US dollar. Technicals are also calling for continuation in the same direction that the fundamentals are leaning. For more details on the technical outlook, read Jamie Saettele’s daily write up and the Fib Guru’s outlook.
[I]Written by: John Kicklighter and Terri Belkas, Currency Analysts for DailyFX.com[/I]