Dismal Non Farm Payrolls Weakens Greenback

Weak UK economic data on Friday added to concerns over the strength of the domestic economic recovery, justifying last week’s BoE decision to maintain its stance on forward guidance. Further validating these concerns, the NIESR GDP estimate for the final quarter of 2013 indicated that economic growth eased during the period. Against this backdrop, this week’s inflation and retail sales reports will offer concrete hints about the state of UK’s economic affairs. In the US, bad weather seemingly contributed to the dismal December non-farm payrolls numbers but nevertheless has fuelled speculation over the continuity of QE3 tapering in the near term. Meanwhile, against the backdrop of Mario Draghi’s doveish comments last week, markets will closely scrutinise economic data from the Euro zone this week.

Pound Sterling – UK Markets

After tumbling below 1.64 against the US Dollar following the release of weak factory data, the Pound recovered and momentarily breached the 1.65 mark against the greenback late on Friday, largely assisted by weak US non-farm payroll numbers. The monthly industrial and manufacturing output in Britain remained flat for November, raising concerns over the strength of the economic recovery in the final quarter of the last year, especially after manufacturing and services sector activities also slipped marginally in December. Confirming fears of a slight slowdown, a report by the NIESR revealed that the domestic economy expanded 0.7% in the fourth quarter of 2013, below the BoE forecast of 0.9% growth. Meanwhile, Sterling is trading lower against the majors this morning. The Lloyds employment confidence report, just out, has shown a marginal improvement in sentiment in the UK. With little on the macro front today, Sterling investors remain on the sidelines ahead of important domestic economic data during the week, including tomorrow’s crucial inflation numbers which will drive risk sentiment in the Pound-US Dollar pair in the near term.

US Dollar – US Markets

The overwhelmingly below par domestic non-farm payrolls print for December weakened the US Dollar against its peers on Friday. Although the US unemployment rate dropped to a five-year low of 6.7% for December, dismal payrolls numbers led to a wide sell-off in the US Dollar as the latest labour market data affects the stance that the Fed will adopt in the future. While the weak employment print can be attributed to bad weather in the US, the latest report has cast fresh doubts about further cuts to QE3 in the Fed’s upcoming monetary policy meeting later this month. However, the bank of St. Louis Fed President, James Bullard, expressed confidence in the economic and labour market recovery in the US, while stating that domestic inflation is likely to accelerate to 1.6% in the year ahead, still below the Fed’s 2% target. Meanwhile, the greenback has moved higher against the majors this morning. With little of note with regards to economic data, investors will keep a tab on the US monthly budget statement today which is expected to show the US government to be in surplus for December. Later this week, a slew of crucial domestic macro releases will sway investors’ sentiment towards the Euro-US Dollar pair.

Euro – European Markets

“Risk-off” sentiment is prevalent in markets following the release of downbeat economic data from the US which propelled the common currency higher against the US Dollar on Friday. After weakening considerably over the last few trading sessions, largely on the back of increased US growth sentiment and doveish comments by the ECB President Mario Draghi, the Euro soared against the greenback on Friday as a weaker than forecast US payrolls report dampened sentiment towards the greenback. Meanwhile, Friday’s final Euro zone GDP print confirmed the currency bloc’s fragile recovery during the third quarter last year. Meanwhile, data just out has shown that Italy’s monthly industrial output rose as expected for November. However, the economic data has had little effect on the common currency as the Euro continues to trade under pressure against the US Dollar this morning. With Mario Draghi announcing that the ECB will resort to further loosening in policy if inflation continues to tread lower, this week’s Euro zone and German consumer price inflation numbers will gain significant market attention.

Other Currencies – Highlights

The Canadian Dollar weakened to four-year lows against its US counterpart on Friday following the release of unexpectedly disappointing domestic labour market report. After dropping to a five-year low, the Canadian unemployment rate rose unexpectedly to 7.2% for December, while the number of employed people in the nation dropped more than expected dragging the Canadian Dollar lower against the greenback. However, a similarly weak employment report from the US limited the Canadian Dollar’s losses against the US Dollar on Friday. The dismal domestic data has added to recent speculation that the Bank of Canada may slash interest rates this year to support the deteriorating economy. In the session ahead, investors will keenly follow the BoC business outlook survey report for further direction to risk appetite. In the absence of major domestic economic data, a barrage of international new flows will drive trading sentiment in the Canadian Dollar during this week.