Euro, British Pound Rally Against the U.S. Dollar Ahead of the U.S. Nonfarm Payrolls Report

Talking Points

• Japanese Yen: Losses Ground Against Most Major Currencies
• Pound: PMI Services Falls to the Lowest Level Since April 2009
• Euro: Annualized Retail Sales Tops Economists Expectations
• U.S. Dollar: Non-Farm Payrolls, Non-manufacturing Composite on Tap

Taking a look at the economic docket overnight, the Euro strengthened against the greenback on the back of a greater than expected Euro-Zone retail sales report as figures rose 1.1 percent in July from a year ago, the European Union’s statistics office in Luxembourg said today. In the upcoming months, sales are expected to face major headwinds as household’s scale back spending amid a high unemployment rate paired with tight credit conditions and tough austerity measures by governments in the bloc in order to battle their high budget deficits. Not to overlook, the final reading for the PMI composite was revised higher, but still remained lower than last month’s reading.

Across the news wire, European Central Bank governing council member Ewald Nowotny said that he sees no dramatic Forex moves, and went onto add that the euro area could have some “advantages” as some market participants may not want to invest in individual countries. Meanwhile, ECB’s Draghi said that marks are “still fragile,” and added that inflation expectations are anchored in Europe. It is noteworthy that as of late, the ECB has revised its GDP growth forecasts for the 16 member euro area in 2010 and 2011 as the current situation in the bloc looks better than policy makers thought. However, I do not expect the central bank to make any changes to its monetary policy until next year as inflationary pressures at the moment remains subdued.

The British Pound pared yesterday’s decline to once again test the upper bounds of the descending channel, which has been intact since the beginning of August. At the same time, the pair will likely face increased volatility as market participants await the labor force report from the world’s largest economy. The economic docket from the U.K. was fairly muted overnight as GBP traders faced the PMI Services report and the official reserves changes for the month of August. The latter came in at $754 million, while the services report tumbled to its lowest level since April 2009. Pound traders will now shift their focus to the Bank of England interest rate decision, which is expected to be released next week. Traders are pricing in a four percent chance that policy makers will hike rates twenty five basis points, according to the Credit Suisse Overnight Index Swaps. Though comments from the central bank are unlikely next week, the Bank of England minutes on September 22nd will likely show board member Andrew Sentance continuing to dissent against the majority, and calling for a rate hike. With high uncertainty regarding economic prospects in the near term, the split amongst the committee may widen in the coming months.

The greenback was fairly mixed overnight against most of its major counterparts. Nonfarm payrolls are on tap, with economists expecting the report to tumble 105,000 in August after taking a nose dive of 131,000 the month prior. At the same time, the unemployment rate is forecasted to increase to 9.6 percent from 9.5 percent in July. Nontheless, the ISM non-manufacturing composite is surveyed to come in at 53.2, which will mark the lowest level since February of this year.

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Related Articles: Currency Markets Shift Focus to the U.S. Nonfarm Payrolls Report for August

To discuss this report contact Michael Wright, Currency Analyst: mwright@fxcm.com

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