Tougher negotiating stance weakening the Pound
Sterling remains on the defensive with a lack of positive factors and further underlying concerns that UK/EU trade friction will have a damaging impact. A tough negotiating stance by the UK government fuelled underlying market unease, especially with no domestic data releases to divert attention. There were also reports that the US Administration was furious at the UK government’s Huawei decision which could have a negative impact on trade talks.
Sterling failed to draw support from the solid tone in risk appetite as underlying sentiment remained cautious. The Pound steadily lost ground with 6-week lows near 1.2920 against the Dollar while the Euro strengthened to near 1.1780. The latest retail sales survey recorded a 5.7% annual increase in the year to January, the strongest gain for 6 years.
US jobless claims declined to 202,000 in the latest week from a revised 217,000 the previous week, although continuing claims did increase. Unit labour costs increased a provisional 1.4% for the fourth quarter, in line with market expectations. Challenger reported a 29% increase in layoffs for January to an 11-month high with significant restructuring in the tech sector. The data overall has little impact with the US dollar maintaining a robust tone while commodity currencies were unable to gain any traction.
Overall, markets expected the US to continue its outperformance relative to other major economies. A decisive Euro break below 1.1000 also helped reinforce negative sentiment with 3-month lows below 1.0970 as the dollar pushed to 15-week highs. The latest US employment report is due on Friday with consensus forecasts for an increase close to 160,000. Expectations of a strong figure have been boosted by Wednesday’s ADP data which will tend to underpin the dollar into the release. The average earnings element will also be important and another weak reading would reinforce expectations of strong Federal Reserve opposition to higher interest rates.
The Euro came under strong bearish pressure during the US session yesterday and slumped to its lowest level since October to 1.0964 before going into a consolidation phase against the Dollar. As of writing, the pair are currently trading around the 1.0960 level.
Earlier in the day, Factory Orders in Germany declined 2.1% on a monthly basis in December and dragged the annual contraction rate to 8.7% to weigh on the Euro. Meanwhile, the ECB in its monthly economic bulletin stated that the current monetary policy would help inflation buildup and sustain the expansion in the Eurozone by confirming that easier borrowing conditions would support consumer spending and business investment.
Data to watch
13.30 USD – Average Hourly Earnings
13.30 USD – Non-Farm Payrolls
13.30 USD – Unemployment Rate