In US trade the euro bounced hard, moving quickly through the 1.22 and 1.23 levels after a better-than-expected non-farm payrolls report and hints from Spain that it might finally consider requesting full assistance from the EU’s rescue funds prompted a sharp ‘risk on’ rally.
Over the course of last week, neither the Fed, the ECB nor the BoE loosened monetary policy further, but this did not detract from the importance of these meetings.
The commitment by President Draghi to start intervening again in eurozone domestic bond markets - once a member in distress formally requests help - has given some much-needed assurance that the ECB is willing to act as a traditional lender of last resort to prevent the eurozone from breaking up. This proposition seems to have taken the worst case ‘euro break-up’ scenario off the table and has seen some shorts cleared out. Additionally, while the 163,000 non-farm payroll jobs created in July were well clear of the 100,000 expected, the slight uptick in the unemployment rate to 8.3% from 8.2% has kept further stimulus measures well and truly on the cards when the Fed next meets in mid-September.
Expectations are now running high that between now and mid-September we will see some form of additional stimulus action from both the Fed and the ECB. This should ensure a base level of support for the euro. Having ended Friday’s Australian session around the 1.2185 level, the euro surged over US trade to close the week at 1.2387. Upon resuming for Asian trade the euro is essentially unchanged, having earlier traded north of 1.24.