EUR/USD fails to extend rally but remains supported above 1.1300 after big US ADP miss

• Weak ADP data has failed to push EUR/USD higher, though the pair continues to trade well supported above 1.1300.
• The euro was boosted earlier in the day after hotter than expected Eurozone inflation spurred hawkish ECB bets.
• The central bank announces policy on Thursday ahead of the official January US labour market report on Friday.

Significantly weaker than expected US ADP national employment change figures for January, which showed a surprise 301K drop versus forecasts for a 207K rise, has failed to push EUR/USD to fresh session highs in the 1.1330s. Nonetheless, the pair continues to trade higher by close to 0.3% on the day and is well supported above 1.1300, taking its three-day rebound from last Friday’s 18-month lows around 1.1120 to around than 1.5%. The latest soft US labour market data will likely help keep Fed tightening bets, which have been pared back in recent days following cautious commentary from Fed policymakers, in check ahead of Friday’s official January labour market report. This, combined with an ongoing further bout of dollar-long position squaring, may keep the pair supported above 1.1300 for now.  

Though ADP’s national employment change estimate has a poor post-pandemic track record of predicting the official payroll number each month, some economists may be inclined to revise lower their forecasts. Prior to the ADP report, the consensus estimate for Friday’s NFP number was 150K. The weak ADP data’s failure to have a lasting market impact is not just indicative of poor NFP predictive power, but also because the headline official payroll number on Friday won’t be the most closely followed labour market metric. Fed officials have stated that, given their belief the US labour market is pretty much back to near-term full employment, metrics pertaining to wage cost pressures are more important to policy-making decisions right now.

ECB meeting looms

Ahead of Friday’s important official US labour market report, EUR/USD traders will be focused on the ECB’s monetary policy announcement on Thursday. Record high Eurozone HICP inflation data released on Wednesday, which surprisingly rose to 5.1% YoY in January versus expectations for a drop to 4.4%, has complicated things for the bank. Up until now, the ECB has reffered to inflation as transitoy and had said it thought YoY inflation rates would have peaked in December.

The hotter than expected data helped boost the euro on Wednesday amid bets that the ECB will be forced into changing its tone on inflation and acknowledge upside risks to its forecasts. “The ECB will have to adjust its inflation forecast upwards from the current 3.2% for 2022 and 1.8% for 2023” analysts at Berenberg noted. “As soon as the ECB raises its inflation forecast, it must also discuss interest rate steps” the bank added, warning that “perhaps the ECB will surprise us on Thursday.” A hawkish ECB surprise could push EUR/USD back towards 1.1400.