US Dollar Mostly Stronger as Chicago PMI Hits Four-Year High

US Dollar Mostly Stronger as Chicago PMI Hits Four-Year High
The US dollar staged a solid rally at the start of the US trading session, and while the currency ultimately ended the day up against many of the majors, the greenback fell throughout the afternoon and experienced hefty losses against the British pound.  Looking to the data on hand, the Chicago Purchasing Managers Index (PMI) surprisingly rose for a third month in December to a nearly four-year high of 60.0 from 56.1, indicating that business activity is growing at a faster clip. A breakdown of the index shows that prices, production, new orders, and employment have all been on the rise, providing a more optimistic view of activity than various measures of manufacturing sector activity, such as the Dallas Fed and Richmond Fed reports. Ultimately, this suggests that the services sector is leading the way to US economic recovery.

On Thursday, there is minimal event risk and trading volumes will remain very low ahead of New Year’s Day. This puts the spotlight on the following week when liquidity will return and a series of key economic indicators will be released. On Monday, the December reading of ISM manufacturing is projected to rise to 54.0 from 53.6, indicating an expansion in US business activity for the fifth straight month.

On Wednesday, the release of ISM non-manufacturing is projected to show that business activity expanded during December, as the index may rise to 50.5 from 48.7. Later in the day, the minutes from the Federal Reserve’s last meeting on December 15 and 16 will hit the wires. Following that meeting, the US dollar initially fell as they announced that they had left the fed funds rate unchanged at 0.25 percent, as expected, and stated that rates were like to remain “exceptionally low” for an “extended period.” However, a statement that “economic activity has continued to pick up and that the deterioration in the labor market is abating,” along with fairly clear deadlines for the central bank’s liquidity programs ultimately led the US dollar higher against the euro and some of its other major counterparts.

On Friday, the US non-farm payroll index (NFP) is forecasted to show that the labor market neither lost nor gained any jobs during December, which would be the best result since December 2007. At the same time, the unemployment rate is projected to remain just below its 26-year high of 10.2 percent at 10.0 percent,  but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view.

Related: Discuss the US Dollar in the DailyFX Forum, Top 5 Events for the Week of January 4

British Pound Dominates in Choppy, Low Volume Trading
The British pound was easily the strongest of the major currencies on Wednesday, surging over 2 percent against the Canadian dollar and just over 1 percent versus the US dollar and Swiss franc. The move was indicative of the low volumes we’re seeing ahead of New Year’s Day, when most of the world’s markets will be closed, which leaves the British pound prone to reversal. Next week, on January 7, the Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent, but this won’t even be the market-moving part of the announcement. Instead, traders will be looking toward the BOE’s policy statement. This has consistently been the prime “news event” of recent rate decisions. Last month, the BOE indicated that they would likely wait until their February meeting before considering any changes to the Asset Purchase Facility (APF), which is currently aiming to purchase £200 billion worth of high quality assets. With no program changes expected this time around, there is potential for the British pound to gain on neutral news as traders will price in an end to the BOE’s quantitative easing program.

Related: Discuss the British Pound in the DailyFX Forum

Euro Down as ECB Says Loan Growth Slowed Further, Money Supply Contracted
The euro ended Wednesday mostly lower against the majors following a report from the European Central Bank showing that consumer and business loans in the region Euro-zone posted their third straight annual decline in November. Additionally, M3 money supply, a gauge of future inflation, fell by 0.2 percent in November, marking the first decline since recordkeeping began in January 1981. All told, the data suggests that the ECB’s liquidity programs have done little to boost credit supply and demand, which limits their ability to normalize monetary policy by raising interest rates in 2010. From a technical perspective, EURUSD isn’t likely to see significant market movement as trading volumes should remain low ahead of New Year’s Day. Resistance for the pair looms above at 1.4428 and 1.4506 (R2 and R3 daily pivots), while key support sits at 1.4210 (200 SMA).

Related: Discuss the Euro in the DailyFX Forum,

Canadian Dollar Decline Keeps USDCAD Range Bound
The Canadian dollar was hit hard on Wednesday as USDCAD bounced from a rising trendline connecting the 2007 and 2009 lows, keeping the pair within its two-month trading range of 1.0400/15-1.0746. The currency will face key event risk next Friday, as the Canadian net employment change for the month of December may rise for the second straight month, this time by 20,000 following an increase of 79,100 in November. However, the unemployment rate is anticipated to hold steady near the 11-year high of 8.7 percent at 8.5 percent. Nevertheless, since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a surprise drop likely to weigh on the currency and an unexpectedly strong result likely to push it higher.

Related: Discuss the Canadian Dollar in the DailyFX Forum

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com