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USD Rebound To Gather Pace On Risk Aversion, NFPs Disappoint

Talking Points

  • U.S. Dollar: Employment, Wage Growth Disappoint - Risk Sentiment Turns Over
  • Euro: Central Banks To Lend Via IMF, ECB Rate Cut On Tap
  • British Pound: U.K. Outlook To Weaken Further, BoE Rate Decision In Focus

U.S. Dollar: Employment, Wage Growth Disappoint - Risk Sentiment Turns Over

The greenback pared the decline from the overnight trade, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) bouncing back from a low of 9,81y, and the reserve currency may continue to recoup the losses from earlier this week as market participants scale back their appetite for risk. Indeed, we saw employment in the world's largest economy increase 120K in November amid forecasts for a 125K print, while the jobless rate unexpectedly fell back to 8.6% from 9.0% in the previous month as discouraged workers continued to leave the labor force. At the same time, wage growth declined for the second time this year, and we may see the shift in risk sentiment carry into the following week as the development dampens the outlook for future growth.

As the Federal Reserve tries to combat the protracted recovery in the labor market, the central bank may keep the door open to expand monetary policy further, and Chairman Ben Bernanke may show an increased willingness to implement another large-scale asset purchase program in order to stem the downside risks for growth and inflation. However, as the data comes in fairly in-line with expectations, the slight pickup in job growth could spark an increased rift within the FOMC, and the central bank hawks may continue to talk down expectations for additional monetary support as Fed officials see the world's largest economy avoiding a double-dip recession. Nevertheless, the drop in market sentiment should prop up the USD throughout the North American trade, and we may see the shift in risk-taking behavior carry into the following week as the fundamental outlook for the global economy remains clouded with high uncertainty.

Euro: Central Banks To Lend Via IMF, ECB Rate Cut On Tap

The Euro advanced to a fresh weekly high of 1.3536 amid rumors for additional central bank support, and the rebound from 1.3211 may gather pace going into the following week as European policy makers step up their efforts to stem the risk for contagion. There's speculation that the central banks in the euro-area will lend as much as EUR 200B through the International Monetary Fund to aid the troubled countries operating under the monetary union, but the relief rally in the EUR/USD could be short-lived should European policy makers struggle to meet on common ground at the EU Summit next week. At the same time, the European Central Bank is widely expected to lower the benchmark interest rate further this month as the region braces for a 'mild recession,' but we may see the Governing Council show an increased willingness to expand its nonstandard measures as record-high financing costs dampens the outlook for the region. Indeed, the developments come out next week will either 'make it or break it' for the euro, and we may see the euro-dollar face whipsaw-like price action in the days ahead as risk trends continue to drive price action in the currency market.

British Pound: U.K. Outlook To Weaken Further, BoE Rate Decision In Focus

The British Pound held within the previous days rage as it gave back the advance to 1.5725, but we may see the sterling face headwinds next week as the economic docket is expected to highlight a weakened outlook for the U.K. As Britain faces a slowing recovery, we may see the Bank of England take additional steps next week to stimulate the ailing economy, and the MPC may vote to expand the Asset Purchase Facility beyond the GBP 275B target should policy makers see an increased risk of undershooting the 2% target for inflation. At the same time, we may see the BoE maintain its current policy as Chancellor of the Exchequer George Osborne plans to launch a GBP 40B credit-easing program to stimulate growth, but the central bank may take a preemptive approach in shoring up the ailing economy in order to stem the risk of a double-dip recession. In turn, there's speculation that the BoE will further expand its asset purchases in 2012 to keep Britain afloat, and we may see the GBP/USD give back the rally from 1.5422 as it appears to be finding resistance around the 20-Day SMA (1.5749).

--- Written by David Song, Currency Analyst