USD softens ahead of NFP

The USD encountered a sell-off for the second time this week as economic data released yesterday from the United States provided further indications to traders that the Federal Reserve will remain in no hurry at all to raise US interest rates. It was generally accepted that after previous GDP growth at an annualised 5% the US economy would slow down somewhat, meaning the market reaction to the previous weeks 2.6% estimate for the 4th quarter was not met with widespread disappointment. However, the more recent durable goods, factory orders and manufacturing data has led to concerns that the GDP estimate would be lowered. These concerns elevated even further yesterday following the US trade deficit widening far more than expected.

Not only has the disappointing trade deficit data led to an increased possibility for the US GDP estimate to be adjusted lower, but also that the Federal Reserve will try to tone down the USD rally witnessed over the previous nine months. The substantially higher valued USD is hurting US exporters and although the United States is mostly a domestic focused economy, the FOMC may now be reassessing what impact the stronger USD is having on its economy. The FOMC also expressed as recently as last month that it would be watching “international developments” closely when deciding on raising US interest rates and aside from the stronger USD, it can also be argued that reduced demand from outside the US is to blame for the widening trade deficit.

Either way, continued signs are being highlighted to traders that anyone expecting the Federal Reserve to raise US interest rates in March/April was being very ambitious. In regards to when the FOMC might raise rates, traders could find some clarity from today’s US Non-Farm Payroll. The ADP employment report suggested just over 210,000 jobs have been added to the US economy last month, which should keep alive optimism that although the Fed might not be raising interest rates as soon as the optimists were suggesting a few months back, it will still be raising rates this year. Only a figure below 200,000 would likely inspire anxiety that the FOMC will delay raising interest rates this year all together, while it should also be remembered wage growth figures are becoming more important to the FOMC when determining when to raise interest rates.

Before USD weakness encouraged market movement, volatility was lower on the currency markets with most spectators closely watching the meeting between Greek Finance Minister Yanis Varoufakis and German Finance Minister Wolfgang Schaeuble unfold. The opening statements from the press conference that “Roots of Greece’s difficulties lie in Greece” and even the two disagreeing on whether they “agreed to disagree” just says everything you need to know regarding how successful the meeting between the two went, with negotiations over the Greece bailout deal likely to go down to the final wire.

The uncertainty over whether Greece will reach an agreement on its bailout deal with the rest of Europe has increased again following the Greek Finance Ministers meeting with Mario Draghi and Wolfgang Schaeuble over the previous two days. To be honest, I am expecting further uncertainty in the run up to the conclusion of Greece’s current loan programme, which expires at the end of this month. The EURUSD concluded trading by recovering its losses from the previous day at 1.1476 with this not being correlated to the meetings taking place surrounding Greece but the “risk on” sentiment from investors that has increased in recent days following the rebound in the price of oil.

The GBPUSD has managed to climb to a monthly-high at 1.5342 with this pair perhaps benefitting the most from the USD softness. The GBPUSD is also advancing following a hat-trick of PMIs this week (Construction, Manufacturing and Services) coming in higher than expected, indicating that UK economic momentum has commenced the year on strong footing. Whether the pair can stretch as high as 1.54 though would be dependent on USD weakness following the NFP later today.

Looking ahead to next week, the GBP will face a major downside risk when the Bank of England (BoE) inflation report is released. It is no hidden secret to anyone that the BoE contain extremely strong views on UK inflation, with the recent unexpected deflation risks following the collapse in the price of oil even leading to the two dissenting members of the MPC switching their votes against an UK interest rate rise. The UK inflation data last month was announced at a historic-low at 0.5% and with the price of oil having continued to make new lows in the month of January, the chances are high that the UK inflation reading could be even worse in February.

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