Risk and services open Thursday higher
Equities and commodity currencies have continued their recent good mood, pulling higher through the Asian session. Asian emerging market currencies are also finally benefiting slightly but remain well underwater on the year.
Risk will likely be defined today by the release of services PMIs from Europe, the UK and US. Once again Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the eurozone wide measure at 09.00 with the UK number due at 09.30.
How data dependent can the Fed be?
The real meat of the week’s data calendar comes in tomorrow’s Nonfarm payrolls announcement from the United States. Everyone is looking for the number to go on and advance what we saw last month i.e. a labour market that is tight enough to increase participation and also move wages higher. The US measure of how many people are still drawing unemployment insurance, initial jobless claims, has remained close to record lows for months now and we do not expect today’s release to deviate from showing us a picture of habitual jobs gains.
Yesterday’s ADP number, another measure of jobs growth, exceeded expectations signalling a 214,000 job increase through February. Some people use this as an indicator for tomorrow’s official stats from the Bureau of Labor Statistics but we have found them to have the predictive powers of a damp rag.
That being said US dollar has rumbled higher following the news and a strong number tomorrow, anything above 215,000 jobs, will cause us markets to question just how ‘data dependent’ the Federal Reserve is given the likelihood that it sits on its hands at its March policy meeting having hiked rates in December.
GBP ekes out rebound
Despite the strong ADP number, GBP was able to fight back above the 1.40 level in GBP/USD with gains for the pound seen across the board. Yesterday’s UK construction PMI offered the currency little help with the release stating that “anecdotal evidence suggested that heightened uncertainty about the demand outlook had led to more subdued job hiring trends in February. Reflecting this, the latest survey indicated that construction firms were the least confident about the 12 month business outlook since December 2014”.
What seems to be giving sterling a little bounce is boredom. Traders and investors got all hyped up when the papers were screaming about a sterling crisis and you couldn’t move for think pieces on Cameron vs Boris. Now however, there is little new news, despite an ICM poll yesterday showing that Remain and Leave had 41% of the vote with 18% undecided.
There is saying in markets that “you should never short a quiet market” i.e. you should never bet against something when things go quiet. Traders who had sold GBP/USD at 1.47 or GBP/EUR at 1.35 have made some decent gains up until now and seem happy to bank them. That being said and despite this run higher, there is definitely sentiment within markets to sell sterling in the short term and these moves higher are only offering more attractive levels. Our near term targets of 1.37 in GBP/USD and 1.25 in GBP/EUR remain as we continue through the referendum hoopla.
The Day Ahead
Away from the services PMI announcements we also receive the latest run of eurozone retail sales data at 10am and US factory orders at 3pm.