The euro slumped on Thursday to its lowest level against the US dollar in five weeks and briefly breached a key support level, but more losses are seen likely if upcoming key jobs data proves stronger than expected. The euro's losses were magnified by expectations Friday's US employment report will show a 175,000 gain in non-farm payrolls for December, according to a Reuters poll.
Some in the market are expecting an increase of as much as 500,000. Upbeat data has painted a rosier picture of the US economic outlook in stark contrast to worries about the eurozone's sovereign debt crisis. The state of the US labour market is key to Federal Reserve monetary policy and a significant improvement should set the stage for debate on whether the central bank will choose to alter the size or scope of its asset purchase program. Analysts say a policy shift would likely benefit the dollar.
"There's a strong consensus that there will be some good numbers coming out of the (US on Friday) after that ADP report, and expectation of a huge payrolls number is fuelling all sorts of dollar buying," said C.J. Gavsie, managing director of FX sales at BMO Capital Markets in Toronto. The euro eased below support at $1.30 on Thursday, a key level that suggests more losses are to come. The unit fell to $1.2997 on trading platform EBS and last traded down 1 percent at $1.3016.
The next downside target is $1.2970, the euro/dollar's December low, traders said. The euro came under heavy selling pressure after spreads between peripheral eurozone government bond yields and benchmark German debt widened on concerns about the region's spreading debt crisis. A round of bond issues by peripheral eurozone economies next week raised concerns about their high debt levels. That caused peripheral spreads to widen versus benchmark German debt, hitting the eurozone single currency in a vicious spiral.
Traders said the euro's slide below its 200-day moving average around $1.3081 accelerated its decline and some said the euro could fall to $1.2575 in fairly short order. Greg Anderson, senior G10 FX strategist with CitiFX in New York, said if Friday's payrolls report show non-farm payrolls gains of above 200,000 for December, the euro/dollar will likely break below $1.30 again and move to the December before heading even lower from there.
"We are seeing a market correction right now that is more in line with sovereign fundamentals," he said. "The euro/dollar should have never been at $1.34 at the end of December in the first place," he said. Anderson also said the euro/dollar would have to drop to the $1.2500 or $1.2550 level before buyers become aggressive enough to take the market in another direction.
"Next week, the headlines and market angst surrounding European sovereign issues will come back with a vengeance, and I expect the euro/dollar to fall (to or even) below $1.25 by the end of the month," he added. Options traders said there has been steady demand for downside euro/dollar strikes around $1.26 over the next three months as investors hedged against expectations that euro area stresses will escalate.
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