Sterling rises vs euro; investors await US payroll data

Tom Tong07/Jan/2011Currency Updates

GBP

Sterling rose against a sluggish euro on Thursday as investors continued to diversify away from the single currency, while the pound was able to shrug off knee-jerk losses triggered by weaker-than-expected UK services data.

Large swathes of Britain’s service sector suffered their first fall in output since April 2009 last month due to snowy weather and weak new orders, the Markit/CIPS services PMI survey showed on Thursday.

British GDP grew by around 0.4 percent in the last three months of 2010, lower than many economists have forecast and little more than half the 0.7 percent recorded in the third quarter of the year, survey compilers Markit said. “There was an initial selloff in the pound but overall the market has taken the data with a pinch of salt,” said Jane Foley, senior currency strategist at Rabobank. “Weather-related components make it difficult to read much into the data and the market will be waiting to see if there’s a bounce in the next month’s reading,” she continued.

USD
The dollar rose to a four-month high versus the euro on Friday and looks set for more weakness if US payrolls data meets recently raised forecasts, strengthening the case for a sustainable economic recovery.

The greenback remained buoyed by an unexpectedly strong ADP employment report earlier in the week which showed a record number of private sector jobs created in December and prompted economists to raise their forecasts for the payrolls data. “The US jobs number is a mega factor going into 2011 for policymakers as well as markets,” said Tom Kaan, a director at Hong Kong-based Louis Capital Markets. “I’d say the recent dollar strength is more likely due to profit-taking on short positions because people were so bearish but if we see US unemployment dip even slightly, it’ll mean that things have actually started getting better,” Kaan continued.

Non-farm payrolls probably increased by an estimated 175,000 in December and the jobless rate eased to 9.7 percent from 9.8 percent, according to a Reuters survey. The US Labor Department will release the closely watched report at 1330 GMT.

Another key event on Friday is Federal Reserve Chairman Ben Bernanke’s testimony on the US economic outlook to the Senate Budget Committee, which investors will scrutinise for updates on the Fed’s plan to continue buying bonds until June.

The dollar index, which measures the greenback’s performance against a basket of major currencies, hit a high of 80.95 on Friday, a level last seen in early December.

EUR
The euro fell to its lowest in nearly four months against the dollar on Friday, down around 0.6% on growing worries about sovereign debt problems spreading to the wider Eurozone.

The single currency was also down around 0.5 percent against the pound, despite an initial spike following the release of negative UK data.

Renewed concerns over the Eurozone periphery weighed on the single currency, with the market seeing Spanish debt issuance next week as a key risk after Portugal was forced to pay higher yields in a Treasury bill auction on Wednesday.

A selloff in peripheral Eurozone government bonds before a series of bond issues next week and an EU proposal that could force those who lend to banks to bear big losses should they fail, helped knock the single currency lower across the board.

Portugal, widely seen as the next Eurozone state at the risk of needing a bailout after Greece and Ireland, will lead a series of debt auctions from European nations next week.

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Written by Tom Tong

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