A solid start to the US earnings season, which added an extra sparkle to last week’s strong labour market data, lifted risk appetite, and pushed world shares and riskier assets higher. The dollar hovered near a three-year high against a basket of major currencies while the Japanese yen fell across the board.
The sterling slipped to its lowest level in nearly four months against the euro and the dollar
Last Friday, data from the US showed American employers added more jobs than analysts had predicted. Non-farm payrolls jumped to 195,000 jobs added versus a forecast for 165,000, which gave more scope to the Federal Reserve’s outlook to start scaling back on its massive monetary stimulus.
European shares eased on Friday, as the prospect of an end to cheap cash by the Fed weighed, but US stocks still rallied more than one percent as the strong jobs data showed the world’s largest economy was on a solid footing.
On Monday, global shares rallied as the focus shifted to the US earnings season, and EU finance ministers agreed to give Greece its latest tranche of aid worth €6.8 billion.
The dollar took a breather against the euro on Tuesday, and eased away from a seven-week high as the Greek aid deal nudged the single currency higher.
The greenback held on to its gains versus the yen, and stayed close to its highest level in five-weeks. USD/JPY touched 101.53 on Monday, ahead of publication of the minutes from the last Fed FOMC meeting and before the start of a two-day Bank of Japan policy meeting. The minutes from the Fed and the outcome of the Japanese central bank’s meeting will probably further highlight the divergence between the two banks and will keep the USD/JPY supported in the near to medium term.
The single currency plunged to a seven-week trough against the dollar at the end of last week after the European Central Bank said it remained ready to cut rates further if necessary. The deal to provide Greece with vital aid to keep the country afloat spurred Asian and European shares higher on Tuesday, and pushed the common currency off its lows against the buck. It also stretched its gains to three consecutive days versus the yen.
EUR/USD fell to 1.2806 last Friday, within sight of May 17 low of 1.2796. The pair pared some of its losses at the start of the week and edged higher to 1.2898 on Tuesday. However, with the Fed and ECB looking to be facing opposite policy directions, we should see further gains for the greenback in the near-term.
EUR/JPY rose to 130.56 on Tuesday, as the yen struggled across the board with demand for safe-haven assets waning. The Swiss franc was also on the back foot, weakening versus all of its major counterparts, but the yen. The Swissie was also weighed by investor’s appetite for riskier assets. EUR/CHF rose to 1.2466, its highest since June 3.
The sterling slipped to its lowest level in nearly four months against the euro and the dollar. A report on factory activity in the UK showed manufacturing output shrank unexpectedly in May, raising concerns over the strength of the recovery in the second quarter. GBP/USD fell to 1.4833, a touch higher than this year’s low of 1.4831 hit on March 12. EUR/GBP jumped to 0.8670 on Tuesday, its highest since March 14. The report showed manufacturing output fell 0.8 per cent against forecasts for an expansion of 0.4 per cent, while industrial output was flat versus market consensus for 0.2 per cent.
At the first policy meeting chaired by new Governor Mark Carney, Bank of England policy makers signaled that they will keep interest rates at a record low for longer than investors are predicting, putting pressure on the pound. The Aussie trimmed some of its recent losses amid speculation that bets against it were exaggerated. AUD/USD rose to 0.9200 on Tuesday, edging away from its lowest since September 2010 by 0.9036, hit on July 3. The Australian currency was also supported by a rebound in gold prices, which recovered to $1,260.84.
Despite its recent bounce, the Aussie remains under pressure in the near to medium term, as a slowdown in Chinese growth and the Fed’s tapering outlook, are likely to keep pressure on it.
Upcoming FX Key events:
Today: Japan BOJ Interest rate decision, French CPI & US weekly jobless claims.
Tomorrow: EZ industrial production, US PPI & US Preliminary Michigan confidence.
Technical Key points:
EUR/USD is bearish, target 1.2700, key reversal point 1.3100. EUR/GBP is neutral.
USD/JPY is bullish, target 105.60, key reversal point 92.50. GBP/USD is bearish, target 1.4670, key reversal point 1.5300. USD/CHF is bullish, target 0.9900, key reversal point 0.9200. AUD/USD is bearish, target 0.8760 key reversal point 0.9520. NZD/USD is bearish, target 0.7500, key reversal point 0.8350.
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Emman Xuereb is a trader at RTFX Ltd.