Friday’s markets were largely dead with the US celebrating Independence Day and, to be honest, we expect a similarly quiet session today. That being said, we are seeing a little bit of USD strength this morning with EUR/USD back below the 1.36 level, which traders seem to happy to base on Goldman Sachs shifting their timeline of interest rate rises by the Federal Reserve forward. The bank now expects that the FOMC will bring interest rates higher in Q3 of 2015 as opposed to Q1 of 2016 previously.
This decision, alongside similar moves by a couple of other banks last week, will be predominantly down to the unexpectedly strong out-turn in payrolls seen on Thursday. The Federal Reserve, the US central bank, is currently encountering a similar problem to what the Bank of England has in the past year; an economy that is seeing its jobs market improve at a much faster rate than the central bank ideally wants or predicted.
Of course, the central bank would never say that the jobs market is improving too quickly – who wishes against people getting jobs in such a politicised landscape – but internally they will be wringing their hands as to how it affects their guidance on interest rates.
June’s non-farm payrolls announcement, the most closely watched job indicator from the United States, saw 288,000 jobs added during the month. To put that into context that is roughly the population of Newcastle. In the past 3 months, the US economy has added 816,000 jobs – slightly less than the population of Liverpool. These are a huge numbers for an economy that supposedly shrank by an annualised rate of the 2.9% in the first 3 months of the year courtesy of the horrendous weather it suffered.
We get the latest set of Federal Reserve minutes this week and we will hopefully be able to get a clearer picture of the Federal Open Market Committee’s thoughts on inflation from them. Weak price pressures are keeping Fed watchers from further upgrading their forecasts on interest rate rises but we would suspect that the minutes will prove broadly USD supportive especially given the background of last week’s jobs report.
Sterling is also gaining against the euro this morning and has hit fresh highs above the 1.26 level in GBP/EUR terms.
Extra stimulus measures from the ECB were talked about during Mario Draghi’s press conference on Thursday and poor data from the Eurozone sees traders increase their bets that it is just around the corner. German industrial production fell by 1.8% in May, it was shown this morning, continuing the recent run of soft Q2 GDP from Europe’s largest economy. Consumer and business confidence measures have been poor of late and the continuing tension between Ukraine and Russia is set to continue this.
The Bank of England meeting this week is, once again, expected to see rates on hold but the continuing pressures of rate expectations is giving sterling the bid. Additional strength could easily be seen in tomorrow’s industrial and manufacturing numbers given the recent trend of manufacturing PMI strength. The rest of the week is rather quiet for sterling data; that is not likely to stop the pound however.
