Market prepares for Non-Farm Payroll figure from the US after euro gains

Tom Tong07/Mar/2014Currency Updates

EUR

The euro jumped to a new two-month high early yesterday afternoon after bullish rhetoric from Marion Draghi buoyed investors. The single currency closed around a cent higher than it opened against both the pound and the dollar, wiping out a months worth of losses in about half an hour. Against the dollar in fact it reached its highest peak this year, and it is now trading at levels not seen consistently since late 2011.

Such a powerful performance would normally come off the back of a major economic or political event, but such is the focus and scrutiny placed on central bankers’ rhetoric that the ECB president managed to move the markets with words alone. The essence of his speech, made after the ECB held interest rates at 0.25%, was that inflation in the region will accelerate to 1.7% by the end of 2016 – compared with a measly 0.8% last month. More important than the inflation data itself was the way Draghi dismissed the possibility of a further reduction in interest rates.

Factory orders were up in Germany for January, jumping another 2.3% to 8.4%. Data out from the EU today comes mainly from France, Italy and Germany, although none of these are particularly note worthy.

GBP

It was a strange day for the pound yesterday, moving in completely opposite directions against the dollar and the euro. It lost a cent against the single currency after strong words from the ECB sentiment, whilst mixed US data nudged it up just under half as much against the dollar.

The biggest event of the day was of course the interest rate and asset purchase decision from the central bank, which was completely as expected and made few waves in the markets. A relatively volatile week for the pound will likely fizzle out without much excitement today, with only consumer inflation measures due to be released. Still, it has still been a relatively successful week for sterling, taking back losses made last week.

Apart from consumer inflation expectations there is no data of note from the UK today; any movements will be driven by US and EU data releases.

USD

The dollar dropped off against its major pairs yesterday, as a combination of mixed US data and easing tensions in Ukraine led to a slight sell off of the currency. It dropped off dramatically against the euro to yearly lows, although losses against the pound were less severe.

The data out yesterday was hard to decipher, and leaves today’s Non-Farm Payroll release difficult to predict. Although initial and continuing jobless claims came in to the upside, at 323k and 2.907m respectively, non-farm productivity for Q4 was down by 50% to 1.8%, 0.7% under expectations. Factory orders were also poor, contracting by 0.7% MoM for January.

The greenback benefited early in the week from the tensions in Ukraine, as investors sought the traditionally ‘safer’ currencies, resulting in a strong performance from the dollar across the board. Investors’ appetite for risk, however, came back with a bang on Wednesday and Thursday, as is made clear by the bullish double-run of the equities market. As they poured their cash into stocks and shares dollar positions were liquefied, leading to a sell off and, consequently, a drop in the rate of around a percent across the board. Incidentally, the Japanese yen, another traditional safe heaven currency, and the Nikkei 500 have followed a very similar trajectory to their US counterparts this week.

Today of course is Non-Farm Payroll day, with anywhere from 140-170 being called. The nature and importance of the measure will likely mean swings in the markets. All eyes on the US for half past one today.

This week the volatile nature of the situation in the Crimea has led naturally to a volatile trading session across equities, bonds and money markets. The outcome of the political situation is hard to predict, so we would be prepared for more volatility in the weeks to come.

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Written by Tom Tong

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