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Currency Market Analysis

Dec 06, 2019 | Currency Market Analysis

Global Themes

Dollar weak ahead of non-farm payrolls
-US payrolls looms
-Sterling gains could fade
-OPEC agree cut, oil steadies

USD

US payrolls looms

US Dollar selling pressure increased yesterday following a week of poor economic data from across the pond. Today, attention shifts to the US non-farm payrolls report at 1:30pm. The key monthly jobs report from the US will wrap up what’s been a rollercoaster week in the currency market with GBP/USD soaring to new 7-month highs and EUR/USD wrestling with the $1.11 handle.

At its last monetary policy meeting, the US Federal Reserve (Fed) stated interest rates would remain unchanged while policymakers assess and scrutinise economic data. The recent run of lacklustre data increases the risk of a dovish tilt by the Fed this when policymakers meet next Tues/Wed. The jobs market is a key indication of the health of an economy, therefore, today’s jobs report could impact policy expectations and thus demand for the USD. The forecast of 180,000 jobs being added in November risks being missed, especially given the poor ADP non-farm payrolls number earlier in the week. The unemployment rate is forecast to remain at 3.6%, the lowest rate since 1969. Average earnings data is expected to remain unchanged at 3.0% y/y.

If the data comes in line with expectations, the dollar may recover some of its weekly losses. A disappointing print, however, could increase odds of a US rate cut and exacerbate the dollar’s decline. EUR/USD could end the week above $1.11 for the first time since early November.

GBP

Sterling gains could fade

This time next week could be a whole different ball games for sterling if the Conservative Party has failed to win a majority in the general election. Sterling has soared on increasing anticipation of a Tory majority result, but for this reason, further upside potential may be limited from here and the downside risk could grow.

As markets continue to price in a Tory victory, GBP/USD has raced to new 7-month highs around $1.3150 and GBP/EUR has reached fresh 2-½ year highs in the mid-€1.18 region. The risk reward may now favour sterling downside from here as traders betting on sterling depreciating have likely closed their positions, which gives rise to another build up in these so-called short positions in the near future given the unpredictability of an election.

One element on the radar should be the uncertainty over UK-EU trade talks over the transition period in 2020, that’s if the UK leaves the EU with a withdrawal agreement by Jan. 31, 2020.

OPEC

OPEC agree cut, oil steadies

The Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC producers led by Russia agreed to cut output by an extra 500,000 barrels a day in the first quarter of next year. This was expected and the price of oil steadied near 2-month highs. Currencies with positive correlations to commodity prices include the NOK, CAD, AUD and NZD, have strengthened albeit modestly.

Oil prices have rebounded over the past week or so on hopes of a US-China trade deal breakthrough. The ongoing trade spat has weakened global demand and therefore production, which has weighed on oil demand and thus dragged prices lower. Earlier this week, the black gold soared over 4% on anticipation of further production cuts but also data revealed falling US crude stockpiles. The confirmation of supply cuts has kept oil prices elevated and commodity sensitive currencies, particularly the CAD and NOK, have appreciated against the US Dollar.

However, the pound remains this week’s winner and GBP/CAD has recorded five consecutive daily gains while GBP/NOK notched new post-referendum highs yesterday.


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