3rd February 2012

Daily outlook

The pound is in danger of profit taking given its sharp spike to almost 3-month highs against the US dollar ahead of this morning’s local data which is forecast to show growth in Britain’s key services sector slowing. Sterling is already under the spotlight after yesterday’s UK construction sector data missed forecasts and comments from the Bank of England’s Adam Posen apparently supporting more quantitative easing. Similarly, the euro is also at risk after the chairman of the Eurogroup, Jean-Claude Junker, said yesterday negotiations to write-off part of Greece’s debts are proving to be “ultra-difficult”.

Talks between Germany and China failed to encourage any real risk-taking after Beijing said it is considering offering more support to Europe’s government rescue funds. Instead, investors became noticeably risk averse in front of today’s critical US employment data. US Non-farm Payrolls, quite often a market-mover, is forecast to show the pace of jobs growth in the world’s leading economy losing steam. On the one hand, the release could take the US dollar to new lows against its main rivals if traders suspect the US Federal Reserve could expand its currency-devaluing, asset-buying program as a result. Equally though, the data could trigger renewed safe haven dollar buying should a worrying jobs report raise alarm over global growth of which the US economy is the main driver.

  • United Kingdom
    CIPS Services PMI Jan
  • United States
    Non-farm Payrolls Jan
    Unemployment Jan
  • Euro zone
    DE Services PMI Jan
    EZ Services PMI Jan
    EZ Retail Sales Dec

Currencies outlook

Sterling

Growth in Britain’s key services sector is forecast to have slowed in January, according to data due to be released this morning. CIPS services purchasing manager’s index is expected to have dipped from December’s 54 level to 53.5, however, given the markets sensitivity to UK data of late, anything indicating a steeper slowdown in activity could weigh heavily on the pound. Sterling is already beginning to slide from mid-November highs against the US dollar after yesterday’s UK construction sector data missed forecasts. Also, comments yesterday from the Bank of England’s Adam Posen hinted at more quantitative easing.

US Dollar

US Non-farm Payrolls data will be today’s focal point for markets and it is unclear how traders will react should the figures come out above, or below, market forecasts. US monetary policy is closely tied to the level of unemployment right now and after the Federal Reserve’s longer-than-expected timeline for low interest rates, a decline in jobs growth may prompt traders to begin pricing in more Fed cash-injections. The US dollar ended Thursday slightly stronger as caution grows ahead of this afternoon’s jobs report. Analysts expect payrolls to have increased by just 150,000 in January, down from 200,000 the previous month. Equally, a positive release could ignite a fresh wave of dollar buying if investors feel they have overstretched positions in currencies such as the euro and pound, both of which are trading at multi-month highs despite fears of recession in each currency’s respective economy.

Euro

After initially a bright start, the euro faded after the chairman of the Eurogroup, Jean-Claude Junker, said negotiations to write-off part of Greece’s debts are proving to be “ultra-difficult”. Consequently, earlier hopes Athens would steer clear of bankruptcy vanished somewhat, prompting a fresh sell-off in the single currency. However, an agreement is still expected to be reached by Monday which helped limit the euro’s decline yesterday while debt sales in both Spain and France added further credibility to the European Central Bank’s new liquidity operations. Nonetheless, Greece still remains a major headwind for the shared currency and the debt-troubled nation is still at risk of being unable to honour a €14.5b debt repayment due mid-March.

Japanese Yen

The yen was relatively unmoved on Thursday as investors paused before today’s critical US employment data that could potentially have a detrimental impact on Japan’s economic prospects. Should a poor US jobs report lead to more US dollar selling on concerns of additional quantitative easing, the yen will almost certainly gain as traders continue to test Tokyo’s resolve in maintaining a weaker, growth-supportive, home currency. Though ignored, there was actually reason for market players to sell the safer yen on Thursday after Chinese Premier, Wen Jiabao, said Beijing is considering increasing its support to Europe’s rescue funds.