Risk took a cautious approach to yesterday’s session, in the UK the FTSE once again pressed to record high levels, supported by firmer Services PMI data which posted the highest level since July 2016 and together with stronger manufacturing in the week, helped to boost the overall composite PMI figure. GBP took advantage with GBPUSD rallying almost 1% on the day and back towards 1.2400, while EURGBP traded as low as .8520 before the stronger Euro took over driving the pair back towards .8550 resistance. In the US the greenback traded lower on the day, selling continued from the somewhat “cautiously hawkish” FOMC minutes, that caution making all the difference and despite some better than expected services data from the US, a weaker ADP employment report kept the wind behind the sellers. US stocks hovered near record highs for much of the day, there was no clear press higher at any stage, with only the NASDAQ closing the day higher with .2% gains. Overnight JPY gave back some of its 3% gains from this week’s lows, stronger equities hurt the safe havens yen’s demand, but a distortion of bonuses vs real wages impacted the real wage growth picture which likely had some impact of JPY selling. We remain on the green platform this morning, with European stocks opening firmer and the Euro also trading higher against USD, JPY and GBP to name just a few major counterparts.
We have been warning about USD strength since the beginning of the week (and through much of December as well) and thus far that concern appears warranted as the greenback has found sellers at highs, and then run into additional sellers following the FOMC minutes and a weaker than expected ADP report. My concern is not on the USD strength in itself, it provides USD sellers opportunity for value, record value in some instances, but it will not last indefinitely. My issue is, the way the greenback is currently priced, it needs to see perfection. It requires the Fed to be vocally behind additional rate hikes, without concern. It requires data to consistently match or beat expectations and while we have seen improvements through 2015 and 2016 in the US economy and “green shoots” rhetoric has long since passed, the reality is that we are still in the Spring of a new normal, where interest rates rise slower and stay lower than we have seen in previous cycles. We also need to see certainty, and with a new era of US Presidency, Brexit and a fragile geo-political situation across the globe, we just do not see that, there will be blips on 2017’s radar. The greenback is down 2.3% from the weeks’ highs although trading marginally firmer ahead of today’s key data releases, with Nonfarm payrolls in focus for many. The market was looking for 175k jobs to be added through December, with a slight rise in unemployment to 4.7%, and a pickup in wage growth of to 2.8% from 2.5%. Anything over 175K will likely be favorable, the unemployment rate itself is almost ignored these days but the wage growth data will likely be the real driver should the headline figure be around estimates.
The Euro has had a firm week thus far, the single currency benefitting from the weaker USD and concerns around GBP as markets shift their view back towards a hard Brexit. The single currency has also had data on its side, this week we’ve seen better than expected CPI Inflation data, strong employment data from Germany, strong PMI figures throughout Europe’s core countries, and this morning attention will be on confidence data and retail sales for the Eurozone region. We have seen EURUSD break through resistance around 1.0500 area, our next target for the week is towards 1.0650 zone where more sellers are lined up. A break above there turns our view for EURUSD bullish and a move back towards 1.0820 and then a jump towards 1.1000 area is not off the cards. Intraday support below 1.0570 and then 1.0500 area should hold larger moves lower. EURGBP has also broken above .8550 resistance and next level now is between .8600/50 where sellers have emerged in the past. This is an opportune area for Euro sellers to take profit on the recent move back higher. We’ll need to see a daily close below .8495 to see progression back to the downside reignited.