US Dollar Sees Upward Momentum on ADP Employment Figures, Fed Rate Sentiment Changes

The US dollar rallied strongly through Wednesday currency trading, as a sharply positive surprise in morning ADP Employment Change data lifted sentiment for domestic economic growth. The private payrolls data showed that employers added the most jobs in 12 months in November. Indeed, the 189,000 additional private sector jobs were nearly four times analysts’ forecasts of a much more moderate 50,000 payrolls gain. Currency traders subsequently bought dollars on speculation that upcoming Non Farm Payrolls report would show a similar improvement, and interest rate markets scaled back expectations for Federal Reserve interest rate cut. The fundamental data leaves US dollar momentum firmly to the topside, and the trade-weighted dollar index remains mere points from fresh monthly highs.

Federal Reserve rate futures continued their recent volatility, with the December Fed Funds contract now showing a smaller 40 percent chance that the central bank will cut rates by 50 basis points at their upcoming meeting. Recent economic developments were likewise enough to send US Treasury bond yields higher for the second consecutive trading day—improving the dollar’s stance against major forex counterparts. Though short-term yields remain near multi-year lows, early signs of improvement suggest that the dollar stands to gain further in the days ahead. Yet such an outlook will very much depend on tomorrow’s critical Bank of England and European Central Bank interest rate decisions—both of which promise strong volatility across major currency pairs.
Otherwise, dollar traders will look to Friday’s critical US Non Farm Payrolls report to drive short-term price movements through currency markets. Current consensus forecasts for a net 75,000 gain in domestic payrolls may be revised higher in light of recent ADP Employment figures. Yet traders know that the private ADP figures have proven grossly inaccurate at several points in the past—leaving questions as to the dependability of the result.
[I]Written by David Rodríguez, Currency Analyst for DailyFX.com[/I]