The strong US dollar got off to a weak start to December as its spectacular rally over recent weeks gave way to a pullback ahead of another round of major risk events. A bright outlook for the US economy and hawkish hopes for the Federal Reserve saw the dollar rally some three and nine per cent against the euro and yen, good for its best month in one and 21 years, respectively. Looming next for markets is the Italian referendum on Sunday, key events with the potential to rouse currency swings. Sterling was the best performing currency out of the December gates, rallying to three-week highs against the dollar on moderating fears of a hard Brexit scenario. The lowest eurozone unemployment in seven years buoyed the euro.
Euro
The euro fought off another big dive, getting a surprise lift from one of the weakest links in the eurozone’s economy: the job market. Unemployment in the eurozone receded to a seven-year low of 9.8 per cent for October while the reading for September enjoyed positive revision to 9.9 per cent which marked the first sub-10 per cent reading since 2011. Upside for the euro is seen on a short leash over the near term ahead of Italy’s referendum tomorrow that poses euro-negative political risk, and the coming ECB meeting on December 8 that could announce an extension of stimulus.
Sterling
Sterling debuted December with an impressive rally of more than a per cent against the dollar which lifted it to its highest in three weeks. On a broader basis, sterling shot to three-month peaks against the euro and the Bank of England’s trade-weighted index. The likelihood of a UK economy-damaging hard Brexit from Europe’s free single market eased after a British official sounded amenable to paying the bloc to maintain access to its open market. Easing Brexit anxiety overshadowed news that British factory growth unexpectedly moderated in November. A marked decline in sterling negativity could see the pound drift higher over the remainder of the year.
US dollar
The biggest tally of jobless claims in five months offered a convenient excuse for investors to take profit on the dollar’s big rally ahead of the next major market event: America’s monthly jobs report. Weekly claims spiked during the holiday-shortened week by 17,000 to 268,000, the most since June. Given the holiday, the market should take the data with a grain of salt, particularly with the underlying trend positive and consistent with a healthy labour market. Numbers yesterday were expected to forecast a stronger growth in manufacturing and construction spending. What mattered more, though, was the nonfarm payrolls report which was forecast to show hiring of 175,000 for November from 161,000 in October. A solid report would keep the focus on the Fed raising rates which has been the bullish fuel behind the dollar’s outperformance.