Overnight Headlines

*USD stable after huge miss on NFP, EUR above 1.2150

*US equities closed at record highs, VIX closed at week’s lows

* US jobs data disappointment eases concerns on inflation

USD got hit on Friday after the massive job’s setback soothed a market worried about the Fed pre-emptively cutting bank on stimulus. The “punchbowl” of liquidity is still very much in place and for longer than possibly previously thought. The USDX has punched through last month’s low at 90.42 and has 90 and then the cycle lows in its sights.

US equities surged higher after the jobs report. Risk appetite was fuelled with small caps outperforming and all sectors higher apart from consumer staples. Energy and industrials were the best performers while tech regained some of its recent losses. European markets are set to open stronger and build on their record highs from last week.

Market Thoughts – Lower for longer

Markets are still digesting the impact of the mammoth miss in the monthly jobs report. (+266k v +1000k expected) It was a wild ride for markets with the bond market especially volatile as it reversed its immediate move due to the details not being as bad as first feared from the headline print. The pressure is now off the Fed to move to a less dovish stance and the FOMC may ultimately feel slightly vindicated in their stance about “transitory” price pressures in some ways.

The data-miss still doesn’t dent the global recovery story and the reflation trade, which means low rates and more risk on should continue to be the way forward. Any Fed move seen at the Jackson Hole symposium at the end of August is now being pushed back to the end of the year.

Chart of the Day – EUR/USD improving

There’s not much on the eurozone data calendar this week so the world’s most traded currency pair will be driven by the wider dollar story. Wednesday’s CPI print is expected to be punchy, with consensus forecasting the headline to come in at 3.7% y/y from 2.6% in March, due to base effects rising abruptly. But we know the Fed isn’t going to react to this with negative real rates potentially falling further and putting more pressure on the greenback. On the flip side, data on the continent is due to rebound into the summer on an improved vaccine rollout picture which will prompt talks about ECB tapering, at least of its emergency QE programme.

EUR/USD was supported last week by the 50% retrace area around 1.20 and the moves at the end of last week have propelled the pair above the key April high at 1.2150. A close above this level is significant while the 100-day SMA in the mid-1.20s zone should act as decent support, having helped keep a floor in the euro in late April. The February high is the main target for bulls at 1.2243 if they can negotiate past the Fib level at 1.2211.