EUR/USD rallies on ECB policy shift as nonfarm payrolls take centre stage

WHERE WE STAND – It’s finally Friday, at the end of what’s been an incredibly long week.

The longest hour of this long week came yesterday, in the form of ECB President Lagarde’s press conference. When a G10 central banker starts waffling about oceans, and water temperature, to explain their policy decisions, it tends to suggest they are more than a little out of their depth!

In any case, the main takeaway from the March ECB meeting, where a 25bp cut was duly delivered, was a statement tweak, with the policy stance now being defined as “meaningfully less restrictive”. A victory for the hawks, here, with that line being an implicit nod towards the possibility of a slower pace of cuts going forwards, particularly with the deposit rate now at the top end of where neutral may sit. Still, with the risks of undershooting the 2% inflation target still high, and growth risks being tilted firmly to the downside, the direction of travel for rates remains lower.

For the common currency, though, the ECB’s hawkish pivot, coupled with Germany’s turning on of the fiscal taps, is creating something of a ‘best of all worlds’ scenario. The EUR traded north of the 1.08 figure yesterday for the first time since last November, while being on track for its best weekly gain in five years. EUR bulls out there can be found singing ‘Ain't no stoppin' us now…We're on the move…Ain't no stoppin' us now…We've got the groove’.

The buck is also on the move, continuing to tumble, as the DXY poked its head under the 104 figure yesterday, with jitters over the state of the US economy continuing to exert considerable pressure, and the ‘US exceptionalism’ theme now being in tatters. All other G10s continued to gain ground against the greenback and, although today’s jobs report is obviously a significant risk, I still favour riding the bearish USD wave for the time being.

Continued gains across the Treasury curve, led by the front-end, are also posing a headwind to the dollar, as both growth and inflation expectations re-rate to the downside, and participants increasingly bet on a more dovish Fed path. I still like the risk/reward of being long Treasuries here, particularly with tariff headlines not going away any time soon, and growth worries subsequently likely to continue to intensify, particularly as govt spending cuts increasingly take effect.

On that note, I remain a tactical equity bear, essentially for the above reasons, with headwinds to earnings growth also likely to be pretty intense as a result of the above factors. The major US benchmarks took another leg lower yesterday, with the market – and I – remaining firmly in rally selling mode for the time being. Trade uncertainty shan’t be going away any time soon and, in fact, yesterday’s decision from the Trump Admin to postpone Canada/Mexico tariffs on certain goods for another month proves this point.

There is, frankly, no coherence whatsoever in the Oval Office, and to load up on risk against that backdrop seems folly. It speaks volumes when participants would rather buy stagnation (Europe), or a market that doesn’t respect property rights (China), than to park money on Wall Street.

LOOK AHEAD – Payrolls; Powell; pub.

I think that’s the ‘order of play’ for most market participants today.

On the jobs front, headline nonfarm payrolls are seen having risen +160k in February, albeit with the forecast range comically large from +30k to +300k. Meanwhile, unemployment is set to hold steady at 4.0%, while average hourly earnings growth should cool to 0.3% MoM by virtue of the longer work week, as January’s weather-related weakness is unwound. Leading indicators for the payrolls print are mixed, though the bulk of the impact of DOGE-related cuts should probably come in the March jobs report, with most of those cuts having come after the survey week. That said, markets will likely react particularly adversely to a downside surprise, which will do nothing at all to allay ongoing growth jitters.

On that note, Fed Chair Powell will probably not offer any fresh policy guidance in his remarks, though comments on the macro backdrop will be particularly interesting, as policymakers grapple with a bumpy disinflationary path, tight labour market, and mounting downside growth risks. Don’t expect any explicit commitments from J-Pow, but until inflation is close to target, the ‘Fed put’ will remain elusive.