Jamie Jemmeson
October 4, 2021

Market to focus on US jobs data for directional clues on future Dollar price action

Sterling Hits The Lowest Level Since January Amidst Negative Sentiment

Sterling hit new lows as continued negative sentiment surrounding supply issues remain front and centre in the press which has also added to ongoing concerns with stagflation. Data, overall, was positive from the region with net lending increasing, the current account deficit narrowing, and Q2 GDP being revised higher. However, the unknown consequences of the furlough officially ending will now start to be deciphered as the scheme ended on Friday.

Last week, Bank of England (BoE) Gov Bailey said that he expected Britain’s economy to recover to its pre-pandemic level of output early next year, a little later than the central bank had predicted last month. The BoE forecast in August that the economy would regain its pre-pandemic size in the final quarter of this year.

Looking to the week ahead, the September services PMI report is a second reading that is not expected to be revised from the first estimate. However, the construction PMI is expected to show a modest rise in activity, although reports of supply issues are again likely to be at the forefront. Price action may continue to sentiment-driven events such as problems or solutions to the UK’s fuel crisis and any news flows surrounding the ending of furlough.  

In the US, Will Friday’s Labour Data Hinder The FOMC’s Plans For November Taper?

The Greenback made impressive gains during the week before losing some of its gains in the latter part. The continued theme of risk aversion was prevalent as investors continue to digest the news from a global economy. Commodity prices were on the rise again, and the Brent crude oil price touched above $80bn last week for the first time in three years. Other issues such as the outlook for Chinese property company Evergrande also remain of concern.

In the meantime, FOMC Powell stated “we are concerned about underlying inflation expectations remaining stable, as they have so far”. This tested the FOMC hypothesis that inflation is going to be transitory. Economic data for the region showed mixed results on consumer confidence (one survey improved whilst the other deteriorated). However, manufacturing, and durable goods remained positive.

The week ahead could be key to the suggestion from the FOMC that they could start tapering QE in November. Friday’s monthly US labour market report stands out in what is otherwise a light week for economic data. Federal Reserve Chair Powell has set the bar low saying that even moderate employment growth would still be consistent with a tapering announcement at the November meeting. The market will be mindful that last month reading for August of 235k was the smallest rise for 8 months. The headline figure is expected around 500k. A large miss could hinder the roadmap for tapering QE which could weaken the currency as the market further pars the prospect for a 2022 rate hike.

In The Eurozone, Inflation Remains Elevated Keeping The Central Bank In Focus

The Euro remained under pressure last week as the dollar maintained a very strong tone. The single currency dipped to fresh 14-month lows just against the US currency even with commodity currencies attempting to stabilise. German consumer prices were unchanged for September with the year-on-year increase strengthening from 3.9% to 4.1% but slightly below consensus forecasts of 4.2%. The rapid rise in Eurozone inflation will also complicate the policy discussion at the European Central Bank (ECB) although a significant early change to Eurozone monetary policy is still seen as less likely than moves elsewhere. Following the results from the German election last weekend, the people still await clear direction on what this means for the nation.

Looking to the week ahead, the market will continue to focus on comments from ECB President Lagarde who is due to speak in Frankfurt on Wednesday. Her comments will be deciphered for clues on future policy action. In terms of economic data, the key reading will be on Wednesday and Thursday with the release of the Eurozone retail sales and German industrial production and factory orders.

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