By Andy Berendieiev, FX Analyst and Institutional Sales Manager at Juno Markets.

The Foreign Exchange market is about to close the busy trading week with one of the key macroeconomic events reflecting the impact of the coronavirus pandemic for the world’s leading economy — the US Non-Farm Payrolls report. Many countries faced an enormous spike of the unemployment rate in April, unprecedented in recent history. Global investors and traders look ahead for the restart of business activity after weeks of the lockdown thus the market reaction to NFP might have a significant mid-term impact on the financial world. This post is aimed to overview the current FX market sentiment, provide fundamental and technical analysis, as well as assume possible scenarios.

Mid-week FX market update: The US Dollar strengthened versus the Euro and Pound but weakened versus the Yen.

The US dollar index measuring the world reserve currency’s strength versus the volume-weighted basket of six major currencies was printing a weekly gain of +1.58% in the European session on Thursday. However, the price action was multidirectional and uneven for different currency pairs.

The single European currency was hit the hardest as EUR/USD was declining by -1.91% or 210 pips at the time of writing (Thursday, 3 PM GMT) on the back of fundamental concerns. The British Pound was sliding -1.72% or 215 pips versus the greenback. Although Sterling bounced off the intraday support at 1.2310 after the Bank Of England announced a unanimous decision to leave the interest rates unchanged, the selling pressure was strong enough to chart the intraday bearish reversal in the afternoon. The Japanese Yen was strengthening amid the risk-aversion sentiment this week.

Key fundamental events published this week.

Besides a series of worse-than-expected macroeconomic reports from the Eurozone, the German Supreme Court’s decision to give the ECB three months to defend its bond-buying plan worth several trillion Euros, weighed on the single European currency. EUR/USD slid on Manufacturing PMI, PPI and Retail Sales reports, although some of the data was slightly optimistic, especially from Germany.

The UK Composite and Services PMI was released better than the market forecast on Tuesday, but Construction PMI plunged more than economists forecasted. The BOE quarterly inflation report and meeting minutes showed that the regulator could impose additional supportive measures to save the UK economy from the crash. As a result, GBP/USD lost all of the mid-day gains, renewing the previous low at 1.2267.

On the other side of the Atlantic, the US Markit Composite and Services PMI declined in April, almost in line with expectations, while the ISM Non-Manufacturing PMI beat the market consensus, showing a slower pace of decline than it was widely anticipated.

NFP preview.

US stock indices ignore the recent negative data and keep hovering around the local peak this week as investors look ahead for a quick recovery of the US economy. So the most interesting question is ‘Would the NFP data cause another wave of brutal sell-off in the financial markets, or is the negative scenario already priced in?’.

The ADP unemployment data, which used to under report changes of Non-Farm Payrolls in the last six months, showed that the US economy lost more than 20 million jobs in April. There’s a concern that the ADP method does not include government payrolls thus the NFP figure might be even worse on Friday (21 million job cuts expected). On top of that, the number of initial weekly jobless claims came in at 3.169 million, while the 4-week average lowered to 4.173M from 5.035M of initial claims. The US Federal Reserve suggested earlier that the unemployment rate could hit 10% this year.

The FX market’s reaction might be on both sides in terms of selling or buying the US dollar. On the one hand, a worse-than-expected NFP report could weigh on the greenback. On the other, the world’s reserve currency could emphasize its role as the safe-haven asset, gaining strength versus other majors despite a possible disappointment of the US labor market data.

There’s also a scenario suggesting that the NFP figure might come in better than expected. In this case, US stock indices could get a boost of optimism and accelerate the bullish rally, while the US dollar might decline amid risk-on FX sentiment. However, such a scenario looks to be unlikely, given the recent data.

Canadian employment report is due to be released at the same time as the US NFP report. Economists forecast 4 million job cuts in April, while the previous report showed -1.01 million cuts in February. The USD/CAD currency pair might be vulnerable to a high level of volatility on Friday.

Technical analysis.

According to the daily chart setup below, the technical sentiment is bearish for the single European currency. EUR/USD tested the horizontal static support at 1.0777 (daily close rate on April 23), a breakout of which by daily close rate might lead to an acceleration of the downtrend with a potential target at 1.0692. Indicators point to a bearish continuation.

The Double-Bolli setup (21-days period) shows that GBP/USD is in a sideways consolidation phase, and the downside action could be limited. Nevertheless, the rate declined for 5 days in a row, while Stochastic RSI highlighted the bearish signal. Mid-term support is placed at 1.2290 and 1.2160 in extension.

Although USD/JPY retraced from the mid-week low at 105.98, the overall technical sentiment remained mixed with a bearish bias. The Ichimoku leading span still reflects the previous rally and both resistance curves are in the uncertainty zone. However, the pair dropped out of the cloud, while the ADX main line points to the growing bearish momentum on the daily timeframe (see the screenshot below).

It’s hard to overestimate the importance of the US NFP report for the financial markets, given the unprecedented crisis the world is facing nowadays. The only thing to be sure about is that a spike of volatility will be noted in the Foreign Exchange market on Friday after the release. Traders should keep in mind the risk management rules, avoiding too much pressure on the account balance.

Stay safe, stay well, and let the profit be with us!

* The information provided does not constitute, in any way, a solicitation or inducement to buy or sell securities and similar products. Comments and analysis reflect the views of Juno Markets at any given time and are subject to change at any time.