Dollar Continues to Rack Up Gains

The dollar surged once again in early European trade today, leading both EUR/USD and GBP/USD to plummet roughly 100 points towards 1.3100 and 1.9400, respectively. The declines in the pairs were counterintuitive to recent economic data, as this morning’s releases out of the Euro-zone and UK were not-entirely negative while reports out of the US continue to point to a potentially dismal NFP figure on Friday. Furthermore, while still signaling concerns regarding inflation, the December 12 FOMC meeting minutes were generally construed as more dovish yesterday. Nevertheless, it appears that until the Federal Reserve says outright that they are ready cut rates, the markets will continue to perceive the US central bank as maintaining a tightening bias, which should underpin greenback strength for the time being.

In European news, purchasing managers in the Euro-zone services sector were more pessimistic in December as PMI unexpectedly dipped down to 57.2 from 57.6 the month prior. A breakdown of the data shows that the employment and new business components both slipped. However, the report was not entirely bearish as business expectations climbed and the price components showed sharp rises. Meanwhile, CPI held below the European Central Bank’s 2 percent ceiling once again in December at 1.9 percent. There is no breakdown with this initial estimate, but recent data suggests that base effects from lower energy prices are leveling off, while other commodity prices remain high and previous energy price increases are slowly feeding through the product chain. Given the December price data, ECB hawks will remain on edge and continue to tout the “low”, “accommodative” interest rate environment, potentially preparing the markets for a rate hike to 3.75 percent before the end of Q1.

In the US today, traders will have ample data with which to attempt to estimate Friday’s NFP release, with Challenger layoff data, initial jobless claims, and the employment component of ISM non-manufacturing. While the ISM non-manufacturing employment component is still in expansionary territory, dollar bears will be hoping for a sharp contraction below 50 - similar to the manufacturing sector - for a reprieve from greenback’s massive gains in the New Year. However, dollar bulls are likely to reign supreme as the economic reports for the day are anticipated to post broadly positive.