Sterling upside while Draghi remains dovish. Curtain rises on Non-Farm Payroll figures at 13.30 GMT

Tom Tong10/Jan/2014Currency Updates

GBP

Sterling was again the bookies favourite yesterday, punching gains across the board. London closed with gains against both the dollar and euro. Following the ADP numbers we saw sterling pivot against the dollar as smart money rushed to back the pound. London opens with the pound nudging down slightly this morning. The market will simply bounce around resistance levels with everybody primed for the curtain raising on Non-Farm Payroll.

Eyes swiveled to the BoE in the morning in what widely expected to be an unspectacular affair with no change in interest rates. Alas the result was no change. The market expects the BoE to leave interest rates unchanged this year, however the general consensus is that this is the wrong call and we should begin to look at an interest rate change. The original barometers for a change in interest rate was a fall in unemployment to 7%, at the current slip rate we will hit 7% this year so a backtrack of BoE forward guidance could lose them some credibility. Regardless the market always tries to second guess the BoE and this is a situation that will play out all year with the focus being interest rates and pace of QE.

Trade deficit figures yesterday were a little disappointing. There appears little signs that the stellar economic growth is feeding through to an improvement in exports. The UK imported £3.2bln more goods and services than exported in November. Clearly, export chipping into the recovery remain far off.

Minor data of note out of the UK today – retail sales, industrial production and manufacturing production.

EUR

London closed with the euro down against a strong sterling although we saw a fairly strong euro stealth rally against the dollar.

Draghi holds his view for a continuation of ultra loose monetary policy. The notion is to boost the recovery and to a degree it is showing some signs of hatching, although growth is limited to certain nations which remains the eternal nightmare of the eurozone.

The market continues to be puzzled by ECB moves. Draghi’s comments yesterday led some leading analysts to bite back and call for lower or even negative interest rates. Another option on the cards is to kick up CPI by getting the money machines rolling out the euros. We saw this was a good move for both the US and the UK economy. However, it remains a fairly bold and controversial solution. Presently Draghi feels there is no need for drastic measures, yesterday he commented- “global demand is a little stronger and domestic demand is helping the recovery spreads”

More bad news for France yesterday with the head of the public audit office saying debt is pushing them towards the brink of a danger zone and tipping back into recession. Specifically French debt is sitting at 93.4% of GDP. Unemployment is 10.8% and from Paris to Perpignan the public is miserable. In one line it does not look good with little sign of short term improvement.

GDP figures out of the eurozone today at 10.00 GMT.

USD

Not a great time for the dollar with slight dips against both the euro and sterling. US continual jobless claims dipped, aiding to US growth.

Initial claims for benefits dipped by 15k to 330k. The market had called 335k. These figures all point to a consistent upside to US growth and wider economic recovery. From employment to consumer spending and industrial production the economy is looking rosy for 2014. As we mentioned yesterday, the majority of the market is bullish on US stocks and dollar prospects for this year. Inflows to both US stocks and the dollar show little sign of abating.

All about Non-Farm Payoll today, ADP figures yesterday support the streets calls for a big number. Expect pivots across the market. Non-Farm Payroll set for release 13.30 GMT. Set to be an eventful afternoon.

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Written by Tom Tong

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