• #GBP Soars on BoE Expectations for Recovery & Inflation
  • BoE Tells Banks to Prepare for Negative Rates but Not Necessary
  • #EURO Falls to 2 Month Lows
  • 4 Week Jobless Claims at 2 Month Low Ahead of Non-Farm Payrolls
  • Will NFP Drive EUR/USD to 1.19 and USD/JPY Above 106?

Investors have been bidding up the #USD US dollar all week and now they are wondering if Friday’s non-farm payrolls report could drive #EUR/USD to fresh 2 month lows or #USD/JPY above 106.  NFPs are the most important piece of data for the US this week but over the past year, we’ve seen a diminishing impact on currencies.  That mostly had to do with vaccine optimism and how it led investors to shrug off weaker numbers.  However this month, non-farm payrolls are expected to improve with job growth returning. In December, 140,000 jobs were lost and tomorrow, US companies are expected to restore 50K jobs.  As illustrated by the details below, there are many reasons to expect a stronger release that should encourage further gains in the greenback. 

Today’s jobless claims report showed the 4 week moving average dropping to its lowest level in 2 months and continuing claims at the fewest since March. The employment component of the manufacturing and service sector ISMs returned to expansionary mode last month as ADP reported a sharp rise in private payrolls. Consumer confidence was mixed with the conference board reporting improvement and the University of Michigan reporting deterioration.  Still there’s enough reasons to believe that Non-Farm Payrolls will rise more than 50K but will that be enough? 

Typically when data validates market sentiment the impact on the market can be more significant. In this case, the dollar could respond particularly well to a better than expected NFP report.  It won’t take much for #EUR/USD to fall to fresh lows and possibly test 1.19 but #USD/JPY moves more slowly and 106 may be a challenge to reach with the 200-day SMA and November high converging near 105.60.  

Arguments in Favor of Stronger Payrolls

  1. ADP Employment Change Rises to +174K vs. -78K in December
  2. ISM Non-Manufacturing Employment Index Rises to 55.2 from 48.7
  3. ISM Manufacturing Employment Index Rises to 52.6 from 51.7
  4. Conference Board Confidence Index Rises to 89.3 from 87.1
  5. Four Week Jobless Claims Drops to Lowest Level in 2 Months
  6. Continuing Claims Lowest Since March

Arguments in Favor of Weaker Payrolls

  1. University of Michigan Index Drops to 79 from 80.7

Sterling #GBP shot higher after the Bank of England’s monetary policy announcement.  The BoE voted unanimously to leave monetary policy unchanged. Some investors thought there would be dissent because a few policymakers favored negative interest rates.  Although the BoE told banks to start preparing for negative interest rates, they also stressed that the move may not be necessary.  This step should have driven sterling lower because it moves them closer to negative rates but the central bank was also more optimistic about growth. They lowered their 2021 GDP forecast due to the lockdown in the first quarter but in their statement, the BoE said:

“Gross domestic product is projected to recover rapidly towards pre-Covid levels over 2021, as the vaccination programme is assumed to lead to an easing of Covid-related restrictions and people’s health concerns.” 

They also said inflation could rise faster than expected with CPI possibly hitting 2% at the start of 2022. With that said, the rally in #GBP/USD was limited by the dollar’s gains.

The #CAD Canadian dollar is also in focus on Friday with labor and manufacturing data scheduled for release.  Like the US, Canada experienced job losses at the end of the year. However they are not expected to return to job growth. If that’s true, then good US data coupled with job losses in Canada would be the perfect catalyst for a stronger recovery in #USD/CAD that could set the stage for a broader move towards 1.30.  The #AUD Australian and #NZD New Zealand dollars also pulled back despite a bigger trade surplus for Australia and stronger increase in building permits for New Zealand.