• US Dollar Enjoys a Sharp Bounce as Sentiment Dips and Service Activity Improves
• British Pound: Can a Timely Shift in the Bank of England’s Monetary Policy Revive the Sterling’s Run?
• Euro Finds Little Comfort in the EU’s Approval of Greek Deficit Plans, Economic Outlook
• New Zealand Dollar Quickly Closes in on Support after the Unemployment Rate Surges
US Dollar Enjoys a Sharp Bounce as Sentiment Dips and Service Activity Improves
The world’s most liquid currency was off to a weak start early in the Asian session Wednesday morning. However, without the necessary fundamental fuel to turn the recent bounce in risk appetite into a true trend, the dollar would eventually retrace all of its losses over the past two days. With today’s reversal, the Dollar Index has returned to the seven-month highs set at the very beginning of the week. Yet, establishing the next phase of the larger bull wave or raising the necessary momentum to reverse the currency’s good fortunes these past three weeks will be difficult to accomplish over the next 24 hours. With the top market-moving NFP release due on Friday, most fundamental traders and investors will hold off on establishing positions (long or short) in the US dollar or any risk-attuned security for that matter. In the meantime, the majors have their specific levels of dollar-resistance to monitor. Greenback bulls will eye 1.3850 for EURUSD, 1.58 for GBPUSD and 0.70 on NZDUSD.
For fundamental drive through the trading session that has just come to a close, the market was borrowing from both the shift in underlying sentiment as well as a round of event risk that would modestly bolster the currency’s fundamental appeal. From the economic docket, the ISM Non-Manufacturing Composite survey for January would stand as the day’s top release. The service sector activity report would encourage by rising to 50.5 (its highest reading since May of 2008); but the full potential that this indicator could have established was otherwise dampened by the fact that the actual number was weaker than the official consensus forecast for a 51.0-print. And yet, the data would maintain its bullish lean thanks to the additional support of the component readings. Looking beyond the headline number, new orders and business activity were both notably higher – a sign that expansion from a sector that accounts for 90 percent of the nation’s output is on a steady incline. Furthermore, considering the non-farm payrolls report is due on Friday and this sector accounts for the vast majority of American jobs; the 17-month high in the employment reading is a welcome figure (though it is worth mentioning that this gauge has not reflected a net outlook for rising employment among its respondents in two years). Keeping on the labor track, the ADP Employment Change figure for January would show a slower pace of contraction and come out with a better-than-expected 22,000 reduction in net payrolls for its January meeting – the fewest in two years. However, this indicator is prone to hefty revisions; so its accuracy at gauging the government’s number should not be over exaggerated.
Looking ahead to tomorrow, the economic docket is relatively restrained. The factory orders reading for December has been usurped by the earlier release of durable goods; and the ICSC Chain Store Sales report is not traditionally considered a major market mover. This lack of meaningful catalysts puts the dollar between the unpredictable influence of underlying sentiment trends and the stabilizing effects of the following day’s employment data.
Related: Discuss the US Dollar in the DailyFX Forum, Will Currency Markets ‘Smile’ on the US Dollar?
British Pound: Can a Timely Shift in the Bank of England’s Monetary Policy Revive the Sterling’s Run?
Between the two central bank rate decisions due for release tomorrow, the Bank of England’s meeting has the greater potential for fundamental impact. While the MPC will not likely change the benchmark lending rate from the 0.50 percent perch it has maintained since last March, there is a good chance that the group will offer a definable change in its policy bearing. For much of the past year, the authority has maintained a progressively dovish approach with the economy struggling to pull itself out of recession and inflation seemingly far off on the horizon. However, recently, there seeds of a hawkish future have been sown. The advanced reading of 4Q GDP officially brought the United Kingdom’s worst recession on recent record to a close. Furthermore, the consumer-level inflation report has offered a genuine reason for concern when the annual reading jumped from a 1.9 percent to 2.9 percent rate (just below the top of the tolerance zone). The most likely step towards bringing policy back to neutral will be a clear expiration on the bond purchasing program. Any upgrades to inflation or growth projections will similarly bolster hawkish and bullish expectations. With the BoE’s quarterly inflation report due next Wednesday, it will be interesting to see how much the group will be willing to discuss in its effort at transparency.
Related: Discuss the British pound in the DailyFX Forum, Trading the Bank of England Interest Rate Decision
Euro Finds Little Comfort in the EU’s Approval of Greek Deficit Plans, Economic Outlook
European Union officials formally offered their support to Greece’s plans to reduce its burdensome budget deficit from 12.7 percent of GDP back below the ECB’s 3 percent limit by 2012. However, among speculators, there is still resounding doubt that the member economy will be able to pull off such a mini-economic miracle when the global economy is still struggling to recover from recession. Event risk was similarly limited in its support of the currency. The revisions to the Service and Composite indicators for January were both positive; but the measures for the month were both notable pullbacks from their recent two-year highs. Looking ahead to tomorrow, the ECB rate decision is top event risk. The market and economist consensus is for no change in policy; and a deeper analysis of the event suggests the same. Last week, a central banker noted suggested that the group will likely hold off from discussing meaningful changes until the March meeting to account for growth updates.
Related: Discuss the Euro in the DailyFX Forum, Trading the European Central Bank Interest Rate Decision
New Zealand Dollar Quickly Closes in on Support after the Unemployment Rate Surges
The New Zealand dollar plunged against 125 points against its Australian counterpart and 100 points against the US dollar in a mere 30 minutes following a surprise deterioration in employment data. While the 0.1 percent drop in employment through the fourth quarter was in line with expectations, the incredible jump in the jobless rate from 6.5 percent to a 10-year high 7.3 percent was a stark surprise. In the debate for a near-term rate hike from RBNZ Governor Alan Bollard, this will certainly discourage a move that could further dampen ailing growth.
Related: Discuss the Australian dollar in the DailyFX Forum,
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: <[email protected]>