09.03.23: Countdown to Key US Payrolls Data Will Drive Near-Term Sterling and Euro Moves against the Dollar
Federal Reserve policy expectations will continue to drive global markets in the short term, especially with fears that the central bank will be more aggressive in raising interest rates.
The Bank of Canada decided against raising interest rates at the latest policy meeting and this may have some impact in influencing the Fed at the next meeting.
The US data releases will, however, be a key component for market direction.
The Fed has insisted that the central bank will be data dependent in deciding whether to sanction a more aggressive rate hike at the March meeting.
There are, however no guidelines on what would constitute data thresholds to trigger the more aggressive policy move which will maintain a high degree of uncertainty.
The key releases will be Friday’s employment report and the March 14th consumer prices data.
In this context, there will still be an important element of uncertainty and consolidation will tend to dominate ahead of Friday’s US jobs data.
There was further evidence of splits within the Bank of England (BoE) Monetary Policy Committee on Wednesday with Dhingra stating that the main risk was for an over-tightening of monetary policy and she preferred keeping rates on hold.
There are still strong market expectations that the BoE will raise interest rates by a further 25 basis points to 4.25% this month, but also further expectations that the BoE would leg behind the Federal Reserve and ECB in raising rates.
The overall Sterling performance will also be linked closely with risk conditions and there was some marginal relief on Wednesday as equity markets attempted to stabilise.
The Pound to dollar (GBP/USD) exchange rate held above the 1.1800 level and edged higher to just above 1.1850 on Thursday.
There is likely to be a theme of consolidation ahead of Friday’s jobs data.
Although there is scope for support near 1.1800, the lack of confidence in UK fundamentals and dollar strength will limit any GBP/USD recovery attempts with very little headway likely.
The Euro to dollar (EUR/USD) exchange rate managed to resist further losses on Wednesday and edged higher to the 1.0550 area.
Overall confidence remained weak amid expectations that the Federal Reserve will adopt a more hawkish stance in raising rates, but there are also expectations of a tough ECB stance which helped curb potential selling.
Gas prices have also dipped to 19-month lows which will help underpin the Euro-Zone economy.
Expectations of a hawkish ECB stance will provide further Euro protection on the crosses and there is potential for near-term EUR/USD support on any dips towards the 1.0500 level, but with very little scope for gains.
The US ADP data recorded an increase in private-sector payrolls of 242,000 for February and above consensus forecasts of 200,000, but there was only a small upward revision to the January increase to 119,000 from the flash reading of 106,000.
The annual increase in wages slowed slightly to a 12-month low of 7.2% from 7.3% the previous month.
The data was firm, but did not replicate the surge in January employment by the BLS which maintained underlying uncertainty.
Fed Chair Powell commented that no decision has been made on a potential 50 basis-point rate hike for the March policy meeting. He insisted that the decision is data dependent and will be guided by incoming data.
The dollar edged lower, but held a firm overall tone amid expectations that the Fed will still adopt a more aggressive stance in raising interest rates.
There will be a reluctance to sell the dollar ahead of Friday’s crucial jobs data.
Rabobank strategist Jane Foley commented; “the hawkish tone of Fed Chair Powell’s semi-annual testimony to the Senate Banking Committee this week transformed recent whispers regarding the potential for a 6% Fed fund rate into a fully-fledged debate.”
There has also been acute yield inversion with the 10-year yield more than 1.0% below the 2-year rate. This reflects increased fears that the Fed will drive the economy into recession and could lead to capital outflows.
Foley added; “The greenback is currently trading off the week’s high as the market awaits these data releases. However, we see the risks as being titled towards a firmer for longer USD in the coming months.”
The Bank of Canada held interest rates at 4.50% at the latest policy meeting, in line with consensus forecasts.
Although it stated that rates will be increased again if necessary, there were further expectations that the Bank of Canada would fall behind the Federal Reserve which undermined the Canadian currency.
The Pound to Canadian dollar rallied to 1.6350 from 1.6260 lows earlier in the day.
The Pound to Australian dollar (GBP/AUD) exchange rate rallied during Wednesday, but failed to hit 1.8000 and dipped to 1.7925 on Thursday.
The Pound to Swiss franc (GBP/CHF) exchange rate edged lower to 2-week lows just below 1.1120 before a slight recovery to 1.1145.
The Pound to yen (GBP/JPY) exchange rate dipped to 10-day lows at 161.70 before a slight recovery to 162.00.
The US will release the latest data on jobless claims on Thursday, but the impact will be limited with important tensions ahead of the key US payrolls data on Friday.
Markets will continue to monitor comments from Federal Reserve officials, especially with the blackout period coming into effect this weekend ahead of the March 22nd policy decision.
Overnight the Bank of Japan will announce its latest monetary policy decision. Consensus forecasts are for no change in policy, but markets are wary of a possible surprise given that this is the last policy meeting for bank Governor Kuroda.
Overall moves in equity markets will continue to have an important impact on currency moves.
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Tim Clayton
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