US Dollar strengthens ahead of today’s nonfarm payrolls release
06/May/2016 • Currency Updates•
The US Dollar strengthened against Sterling, the Japanese Yen and most notably the Euro on Thursday as investors closed out profitable positions against the US Dollar ahead of this afternoon’s US labour report.
This afternoon’s report, particularly the all-important nonfarm payroll number, will undoubtedly dominate trading today. Unemployment is expected to remain unchanged at 5%, with any job creation total around or above the 200,000 mark likely to provide good support for the Dollar and cause investors to price in the possibility of a Federal Reserve interest rate hike in June.
In the UK, uncertainty regarding the outcome of this summer’s EU referendum continues to provide a drag on the UK economy following yesterday morning’s dismal service sector data. Growth in the service sector slowed to a three-year low in April, marking a hat-trick of underwhelming PMI performances this week, following slower growth in both the manufacturing and construction sectors.
The abrupt slowdown in Britain’s dominant services sector is a particularly worrying development, given its heavy contribution to overall economic output, with the UK economy already looking firmly on course to suffer a slowdown in growth in the second quarter of the year.
Elsewhere, the Yen weakened after Japan’s Prime Minister Shinzo Abe claimed the Bank of Japan would take ‘appropriate action’ in the currency market to prevent an excessive strengthening of the currency.
Among emerging market currencies, the Polish Zloty weakened by close to 1% on concerns that ratings agency Moody’s could downgrade Poland’s sovereign rating next week.
Meanwhile, the Turkish Lira recovered, having plunged after Turkey’s Prime Minister Ahmet Davutoglu announced his resignation.
Major currencies in detail:
Sterling was range-bound against the US Dollar for much of yesterday, ending just 0.25% lower.
Yesterday’s services PMI heaped further pressure on the UK economy, which appears to have got off to a fairly dismal start to the second quarter. The PMI fell to just 52.3 from 53.7, well below even the most pessimistic of expectations.
This represents GDP growth equivalent to just 0.1%, which would mark a significant slowdown compared to the 0.4% expansion recorded in the first three months of the year.
However, we believe calls for a Bank of England interest rate cut are unwarranted, with a vote to remain a member of the EU next month likely to provide a significant boost to Britain’s economy in the second half of the year.
No UK economic releases today means that all attention among Sterling traders will be on developments in the US this afternoon.
The single currency fell sharply by 0.7% against the US Dollar and 0.6% versus the Pound on Thursday, despite markets being closed in the Eurozone to mark Ascension Day.
Since racing to a nine-month high against the Dollar on Tuesday, the Euro has now fallen by close to 2% versus the Greenback in under three sessions.
The economic recovery in the Euro-area is expected to continue, supported by household consumption and a rebound in investments, according to the latest economic bulletin from the European Central Bank released yesterday.
Despite this, risks remain ‘tilted to the downside’, with a weak global economy likely to keep growth low in the coming quarters.
With no economic announcements in the Euro-area today, the Euro will be almost exclusively driven by this afternoon’s nonfarm release in the US.
The US Dollar rose by 0.6% against its major peers on Thursday, ahead of today’s labour report.
The Dollar received some support yesterday from hawkish comments by Fed member James Bullard. Bullard suggested that global headwinds and negative effects of a strong Dollar were waning, with core inflation in the US trending ‘somewhat higher’.
Last week, US jobless claims were slightly worse than expected following a recent strong performance that has seen the figure reach multi-decade lows. Claims increased by 17,000 to 274,000, although the four-week moving average remains around historic low levels.
Today’s labour report at 13:30 UK time will undoubtedly be the highlight, with volatility in the major currencies close to assured.
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