EUR / USD
The Euro held a firm tone into Friday’s New York open with further support from the more hawkish ECB rhetoric and expectations of higher yields.
US non-farm payrolls increased 467,000 for January, substantially above consensus forecasts of 150,000 and there was a large upward revision to 510,000 for December compared with the original figure of 199,000. There was a small increase in manufacturing jobs for the month while there was a reported increase in leisure and hospitality jobs of over 150,000 compared with expectations that the Omicron variant would lead to a decline on the month.
The unemployment rate edged higher to 4.0% from 3.9% and marginally above expectations, although this was due to a significant increase in the participation rate and the household survey recorded an employment increase of over 1.0 million on the month which continued to indicate a tight labour market.
Average hourly earnings increased 0.7% on the month compared with expectations of a 0.5% gain with a year-on-year increase of 5.7% from 5.0% and well above forecasts of 5.2% which reinforced expectations of upward pressure on wages.
The data overall was strong with markets taking particular note of the wages data. Futures markets continued to price in a 100% chance of rate increases for March and May with over a 50% chance of five rate hikes by November. The dollar posted strong net gains after the data but failed to sustain the advance with the bouncing to the 1.1450 area at the European close. The Euro edged lower on Monday with a limited correction and traded around 1.1430 with a slight recovery in commodity currencies.
US Treasuries weakened sharply following the US jobs data with the 10-year yield jumping to around 1.92%. Higher yields were important in underpinning the dollar while equity markets overall were little changed which limited scope for yen demand. The dollar advanced to highs around 115.40 against the yen before fading slightly while the Japanese currency remained vulnerable on the crosses given the increase in global bond yields.
Rhetoric from Fed officials will continue to be watched closely ahead of Thursday’s latest CPI data with the data potentially important for the March rate decision.
China’s Caixin services-sector PMI index dipped to 51.4 for January from 53.1 and below expectations. There was weakness in new orders and exports dipped sharply on the month while domestic demand was subdued. Chinese markets were higher after re-opening following the new-year holidays which helped underpin risk appetite.
Overall, the dollar was able to hold above 115.00 against the yen and secured a limited net advance to 115.30 in early Europe with the Euro around 131.80.
The UK construction PMI index strengthened to a 7-month high of 56.3 for January from 54.3 previously and compared with expectations of an unchanged reading. A slowdown in the residential sector was offset by stronger growth in the commercial sector. Employment increased at a faster rate while cost and supply-side pressures eased slightly with the lowest rate of price increases for 10 months.
Bank of England Governor Bailey again called for restraint on wage increases or there would be an increased risk of inflation moving out of control. Chief Economist Pill reiterated that further gradual rate increases were likely and that more aggressive action should not be anticipated, although the risks would increase if pay pressures persist. Sterling overall was unable to make any headway with doubts whether the Bank of England would push ahead with sustained rate increases and there were also important reservations over the growth outlook. Sterling retreated to lows near 1.3500 against the dollar before recovering while the Euro posted a further strong recovery to near 0.8460. Political developments had little impact as the immediate temperature cooled marginally, although underlying tensions remained high.
CFTC data recorded a further increase in Sterling shorts to near 24,000 contracts in the latest week from below 8,000 previously, increasing the potential for short covering. There was little change on Monday with the UK currency trading around 1.3530 as the global risk appetite held steady.
The Swiss franc continued to lose ground on Friday with the currency undermined by expectations of higher yields in the US and Euro-zone. The Euro strengthened to highs near 1.0600 while the dollar secured a net advance to near 0.9250.
Yield expectations will remain important in the short term with any rhetoric from the National Bank watched closely. The latest data on sight deposits will also be monitored closely, although yield trends are liable to dominate in the short term with the Euro retreating to around 1.0575 on Monday.