Foreign Exchange News
12 January 2015

Weak Wage Growth Knocks USD Rally

EUR/USD 1.1816
GBP/USD 1.5112
GBP/EUR 1.2788 (0.7819)
EUR/CHF 1.2008
GBP/CHF 1.5355
GBP/AUD 1.8475

Asian markets opened in the red following the lower close in US stocks on Friday. The USD has been facing some selling pressures and despite Friday’s better than expected labour market report, underlying wage growth figures were less than impressive encouraging some USD profit taking from the New Year rally in USD. The AUD was one of the better performing currencies in overnight trade, the move higher in AUD pairs was led by a rally in short term Aussie bond yields following a slight firming of Aussie monetary policy outlook and with interest rate expectations shifting higher. The early sell off in stocks in Asia helped lift JPY, the traditional safe haven benefiting from risk aversion flows. GBPUSD rallied from lows below 1.5050 to an overnight high just below 1.5200, before M&A activity has sent the pair falling lower once again. Comments suggesting UK pharma Shire’s deal to buy US biotech NPS Pharmaceuticals for $2.5bln causing some of the decline this morning.

Today’s data calendar remains light with little major event risk to focus attention on, so we will have our eye on news flow and central bank speakers. The most interesting comments may well come from the Atlanta Fed’s President, Dennis Lockhart is due across the wires later this evening and his comments will be closely watched, especially after some dovish comments following Friday’s labour market report. The headline NFP figure was better than expected, posting a rise of 252k versus the 240k expected. Granted this is not a major pick up verses expectations and a significant drop from the November figure, but is consistent with US labour market growth with the unemployment rate falling to 5.6%. The shock for USD came in declining wage growth, wages fell by .2% through December, the biggest decline in wage growth in 9 years. Lockhart was on speaking with Bloomberg following Friday’s labour market data and suggested that he would rather be “ a little bit late” on tightening, seeing Fed rate increases into Q3 or later. Any comment in a similar vein may well see USD facing selling pressure in to the close of the US session, especially in the absence of any other major USD data. EURUSD currently trading just above 1.1800, while GBPUSD is trading back towards 1.5100.

There was a minor EUR revival in the latter end of last week but nothing to suggest the negative momentum around the single currency will change. The Eurozone continues to suffer from plummeting inflation and flagging credit growth and markets have are now speculating the ECB will announce their QE program in the January 22nd meeting. What exactly the ECB QE program will entail is still up for discussion but sovereign bond purchases have been mentioned as a potential inclusion, while the scale of QE is still unknown. ECB president Draghi mentioned in December that they may look to expand the ECB’s balance sheet up to €1 trillion, while late last week there were muttering of a €500 bln package, this causes some difficulties for EUR traders, if the ECB does not meet market expectations for QE we may well see the EUR claw back some of its losses. Greek elections on the 27th January will also cause Euro volatility into the end of the month, talks of a Grexit will likely grow as the elections get closer.

The NIESR UK GDP estimate released on Friday suggested December GDP growth was at .6%, in line with recent monthly estimates but the bigger picture for potential GBP strength/weakness comes from tomorrow’s CPI inflation reading. Despite recent weak December PMI readings, the last few months UK data has tended to be better than expected, the primary thorn in the side of GBP strength comes from the BOE’s warning inflation may drop below 1%. While inflation remains weak in the UK the prospect of BOE rate hikes will likely remain distant, keeping the value of GBP crosses pinned against currencies with tightening monetary policy expectations.

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