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Positive data from US gives GBP mixed direction

Positive data from US gives GBP mixed direction

Yesterday saw a day of broad strength for the US Dollar, as robust US economic data raised hopes over the strength of the country’s recovery. The ADP survey of US private sector employment showed an increase of 270,000 in December, well ahead of an expected increase of 100,000. With the spectre of Friday’s non-farm payrolls looming large, this was taken as a hugely positive indicator of what the outcome could be. Furthermore, with such a significant increase, the payrolls rise could be taken as a sign of the kind of broader improvement in the US economy that could allow the Fed to end the QE program sooner rather than later. Across the Atlantic, the Euro fell further as an auction of Portuguese 6 month bills saw yields surge, reigniting sovereign debt concerns and doubts over the ability of the peripheral nations to finance themselves through conventional debt markets. withdraw its policy accommodation and by association curtail the USD’s slide. The USD did indeed witness a stronger first half of 2010, but more by default as the exploding Euro Zone debt crisis impacted negatively on investor risk appetite. The USD’s gains came as a result of risk aversion and were anything but the result of US economic strength and thoughts of a Fed policy shift, indeed we saw the direct opposite on both fronts towards late 2010. Now that the data is improving, it could be seen as a proxy for the global outlook, which, based on the post-GFC activity, would weaken the Dollar as investors seek risk. Equally, the data improvement and widespread criticism of the Fed’s QE2 program from foreign governments and Republicans alike has fed suspicion that the FOMC will cut short it’s asset buying spree, though arguably it is too early to subscribe to the notion that the data is sufficiently strong and sustainable enough to force a reassessment of Fed policy. In summary, the sheer number of conflicting forces acting on the Dollar, both on American and overseas shores ensure that though the USD will likely be volatile in 2011, its direction is anything but clear.

If the US data stream continues in the positive vein seen over the last 6 weeks, it will be interesting to see what effect his has on the Dollar. This time last year the USD’s broad index was coming off a nine-month, 13% decline as investors had resumed long-term USD selling. At that stage however and with the US labour market moving from job cuts to job gains, one of the main debates for 2010 was at what point during the year would the Fed start to

Today, for the Eurozone we have consumer, industrial and economic confidence figures, whilst the reliance of the Eurozone on Germany should be highlighted by the factory order numbers. In the UK we have PMI data for services, and the weekly jobless claims figures for the US will provide further direction on the payrolls report tomorrow, though Christmas hiring & firing may skew the numbers somewhat.

Current Indicative FX Rates (mid-market):

GBP/EUR: 1.1820 GBP/USD: 1.5505

GBP/AUD: 1.5540 GBP/JPY: 128.90

EUR/USD: 1.3110 USD/JPY: 83.100

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