Currency markets were given another jolt following the latest US unemployment figures and investors will also have plenty to think about this week as central banks in the UK, eurozone and Australia prepare to deliver their latest monetary policy decisions. A surprise increase in US unemployment saw the US dollar fall sharply while manufacturing data from the UK raised concerns about the British economy, forcing the pound even lower and to a 15-month trough against the euro.
Sterling
The pound’s troubles deepened after weak UK manufacturing data raised concerns this week’s services PMI data will reinforce fears that Britain’s fourth quarter economic contraction may be the start of another recession. The survey from CIPS covering the UK’s dominant services industry is likely to show another month of shrinking business activity in January, giving investors more reason to panic about Britain’s triple-A credit rating. The pound dropped to a 15-month low against the euro and the currency’s outlook remains far from clear, facing both short and long term monetary policy uncertainties.
US dollar
Trade in the US dollar was extremely choppy, varying by almost two cents on the day against the euro following US unemployment and manufacturing data which caught markets by surprise. The number of people out of work in the US edged higher from 7.8 to 7.9 per cent in January versus forecasts of no change, bolstering prospects the Federal Reserve will remain locked in continuous quantitative easing throughout the year until unemployment falls to 6.5 per cent. US equities surged on the idea of more stimulus, while the US dollar dropped to its weakest since September 2012 against a basketof currencies.
Euro
The euro finished last week strongly in what turned out to be an impressive January for the single currency, rallying to new 2011 highs against the British pound and US dollar on budding optimism the worst of the debt crisis is over. Stronger-than-expected eurozone manufacturing data and steady unemployment figures on Friday reinforced the European Central Bank’s belief that Europe is now seeing signs of “positive contagion”. Investors backing the single currency are growing in numbers and have been since ECB President Mario Draghi delivered a reassuring assessment of the eurozone in his January monetary policy statement. Draghi’s influence on financial markets has grown significantly, and few will forget his promise last year to do “whatever it takes” to safeguard the euro.