Dollar rally resumes after its post-payroll dip
13/Apr/2015 • Currency Updates•
The Dollar recovered rather impressively last week from its recent bout of weakness. The softer tone of US economic news culminated on Easter Friday as the March payroll report in the US also disappointed expectations and the Euro managed to peek just above the 1.10 level against the Dollar, with Sterling not far behind. However, the minutes of the FOMC March meeting openly discussed the possibility of a June interest rate hike and the Fed took a sanguine view of recent weakness, ascribing it, in large part, to the harsh winter in the US. The Dollar rally immediately resumed, and the Euro and Cable all ended the week hovering near multi-year lows against the greenback. All eyes now turn towards upcoming US data releases to seek confirmation of the Fed’s view regarding the temporary nature of the US economic slowdown.
Electoral polls continue to dominate headlines in the UK, but there is as yet little evidence that Sterling is paying much attention to the expected outcome.
Last week the Pound reverted to its traditional role as a half-way house between the Dollar and the Euro. In line with all major currencies, it fell against the Dollar by just under 2%, but managed a similar rally against the Euro. The latter performance was mostly driven by the key economic release of the week: a strong upward surprise in the March business sentiment PMI index, which rose strongly to a 7 month high of 58.9, far above expectations and consistent with faster growth than most forecasters (ourselves included) have pencilled in for the first quarter.
The recent string of solid economic reports from the Eurozone turned slightly more mixed last week.
Retail sales were considerably stronger than expected across the Eurozone. While the February number showed a slight drop in real terms, sales so far this year are 5.5% above the fourth quarter level. Industrial production numbers were more subdued, with a moderate negative surprise in Germany. Production grew by 0.2% in February, but the January number was revised down by 1%. Overall, these news leave our view unchanged: we expect another modest acceleration in Eurozone growth to an annualised rate of 2% in the first quarter of 2015.
Next week, all eyes shift to the ECB meeting on Wednesday. We expect President Draghi to acknowledge the improvement in the Eurozone’s economic performance, but otherwise keep a low profile and keep the post-meeting press conference as uneventful as possible. In the absence of any market-moving announcements from the ECB, we expect the Euro to continue to be driven mostly by the economic releases and monetary policy developments in the US.
The March payroll report seemed to confirm that recent softness in US economic growth has also affected the labour market. The pace of job creation last month was about half of the strong pace of the prior six months. The key question now is whether the undeniable softness in US numbers is due to harsh winter weather in much of the country, or whether it reflects a more sustained weakening in growth momentum. If the latter, we should soon see a significant rebound in US numbers, as pent-up demand is released with the arrival of spring.
Our view, and apparently that of the majority of the FOMC members, is that this weakness is indeed mostly a result of winter weather, as was the case in 2014. The JOLTS report on jobs openings, which continued to show steady increases through February and is less affected by weather conditions, appears to support our view. In this context, next week’s retail sales report takes on added importance. If our view is correct, we should see a significant rebound after weak readings in the past three consecutive months.