Talking Points
- U.S. Dollar: Employment, Wage Growth Disappoint – Risk Sentiment Turns Over
- Euro: Central Banks To Lend Via IMF, ECB Rate Cut On Tap
- British Pound: U.K. Outlook To Weaken Further, BoE Rate Decision In Focus
U.S. Dollar: Employment, Wage Growth Disappoint – Risk Sentiment Turns Over
The greenback pared the
decline from the overnight trade, with the Dow Jones-FXCM U.S. Dollar
Index (Ticker: USDOLLAR) bouncing back from a low of 9,81y, and the
reserve currency may continue to recoup the losses from earlier this
week as market participants scale back their appetite for risk. Indeed,
we saw employment in the world’s largest economy increase 120K in
November amid forecasts for a 125K print, while the jobless rate
unexpectedly fell back to 8.6% from 9.0% in the previous month as
discouraged workers continued to leave the labor force. At the same
time, wage growth declined for the second time this year, and we may see
the shift in risk sentiment carry into the following week as the
development dampens the outlook for future growth.
As the Federal Reserve
tries to combat the protracted recovery in the labor market, the central
bank may keep the door open to expand monetary policy further, and
Chairman Ben Bernanke may show an increased willingness to implement
another large-scale asset purchase program in order to stem the downside
risks for growth and inflation. However, as the data comes in fairly
in-line with expectations, the slight pickup in job growth could spark
an increased rift within the FOMC, and the central bank hawks may
continue to talk down expectations for additional monetary support as
Fed officials see the world’s largest economy avoiding a double-dip
recession. Nevertheless, the drop in market sentiment should prop up the
USD throughout the North American trade, and we may see the shift in
risk-taking behavior carry into the following week as the fundamental
outlook for the global economy remains clouded with high uncertainty.
Euro: Central Banks To Lend Via IMF, ECB Rate Cut On Tap
The Euro advanced to a
fresh weekly high of 1.3536 amid rumors for additional central bank
support, and the rebound from 1.3211 may gather pace going into the
following week as European policy makers step up their efforts to stem
the risk for contagion. There’s speculation that the central banks in
the euro-area will lend as much as EUR 200B through the International
Monetary Fund to aid the troubled countries operating under the monetary
union, but the relief rally in the EUR/USD could be short-lived should
European policy makers struggle to meet on common ground at the EU
Summit next week. At the same time, the European Central Bank is widely
expected to lower the benchmark interest rate further this month as the
region braces for a ‘mild recession,’ but we may see the Governing
Council show an increased willingness to expand its nonstandard measures
as record-high financing costs dampens the outlook for the region.
Indeed, the developments come out next week will either ‘make it or
break it’ for the euro, and we may see the euro-dollar face whipsaw-like
price action in the days ahead as risk trends continue to drive price
action in the currency market.
British Pound: U.K. Outlook To Weaken Further, BoE Rate Decision In Focus
The British Pound held
within the previous days rage as it gave back the advance to 1.5725, but
we may see the sterling face headwinds next week as the economic docket
is expected to highlight a weakened outlook for the U.K. As Britain
faces a slowing recovery, we may see the Bank of England take additional
steps next week to stimulate the ailing economy, and the MPC may vote
to expand the Asset Purchase Facility beyond the GBP 275B target should
policy makers see an increased risk of undershooting the 2% target for
inflation. At the same time, we may see the BoE maintain its current
policy as Chancellor of the Exchequer George Osborne plans to launch a
GBP 40B credit-easing program to stimulate growth, but the central bank
may take a preemptive approach in shoring up the ailing economy in order
to stem the risk of a double-dip recession. In turn, there’s
speculation that the BoE will further expand its asset purchases in 2012
to keep Britain afloat, and we may see the GBP/USD give back the rally
from 1.5422 as it appears to be finding resistance around the 20-Day SMA
(1.5749).
--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong
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