USD Gives Back Gains

EUR/USD
The release of worse than expected jobs report by the BLS on Friday which in turn resulted in broad based USD weakness ensured that the pair was able to recover losses made earlier in the week which were prompted by Draghi’s firmer tone on forward guidance and finished the week in positive territory. Of note, ECB’s strengthened wording on forward guidance resulted in the bull flattening of the Euribor curve and also saw the EONIA 1y1y rate come under significant selling pressure. On the topic of money market rates, Draghi said that it is difficult to link EONIA to excess liquidity. ECB's Draghi also said that there are two contingencies that could lead us to act, adding that the governing council discussed all possible instruments and discussion continues. However he also warned that it is pointless to speculate which instrument the ECB would use. In terms of macroeconomic events, this week saw the release of somewhat mixed Eurozone Services PMIs, with particular underperformance evidenced in France (printed another sub-50 reading). On the positive note, Irish debt agency NTMA made a successful return to capital markets and syndicated 10y bond, while Portuguese debt agency successfully syndicated 5y bond.

GBP/USD
Less than impressive macroeconomic releases failed to weigh on the pair, which instead benefited from a weaker USD and also upbeat sentiment towards the peripheral Eurozone after both Ireland and Portugal syndicated 10y and 5y bonds respectively. Of note, this week saw the release of weaker than expected services PMI (lowest since June), as well as worse than expected Manufacturing and Industrial Production reports. At the same time, according to the ONS, the gap between imports and exports of goods shrank in November, as exports were boosted by higher sales to recovering economies in the European Union. Elsewhere, just like the ECB, the BoE kept the benchmark borrowing rate unchanged. On the topic of rates, the Sunday Times reported last weekend that Mark Carney is set to amend the Bank of England’s forward guidance in the coming months by changing the unemployment benchmark to 6.5% from 7.0% at which an interest rates rise will be considered. However, analysts at JP Morgan said they do not expect the BoE to reduce its 7% threshold on the unemployment rate even if it is crossed below that level earlier than predicted.

USD/JPY
Broad-based USD weakness following the release of worse-than-expected jobs report by the BLS saw the pair give back gains made earlier in the week and ensured that the pair finished the week largely unchanged. Of note, upbeat sentiment towards the peripheral Eurozone, which in turn supported EUR/JPY, helped to offset JPY strength which stemmed from unfavourable interest rate differential flows, with USTs aggressively bid on Friday. In terms of Japan specific commentary, BoJ board member Shirai said it is possible to aim for 2% inflation at a slower pace than 2-year time frame and that currently there is a lot of uncertainty surrounding the time frame for the BoJ's inflation target.