Trends this week illustrated the importance of positioning ahead of key economic events and Market reaction to events. The Bank of England policy decision was in line with consensus forecasts, but markets had speculated that there could be a more hawkish tone and the absence of this support undermined Sterling. In contrast, there were doubts surrounding the US Employment data into the release and stronger than expected data triggered a sharp dollar correction.
Political factors again had a significant impact during the week as special counsel Mueller announced that a grand jury would be convened to investigate Russian involvement in the 2016 Presidential Election. The dollar did dip lower after the reports, although economic data regained dominance late in the week.
The US ISM non-manufacturing data was weaker than expected which undermined confidence in the overall outlook, although there was still evidence of solid growth in the US economy.
There was a firm report for the ADP employment release, but the headline report of the week was inevitably the latest employment report.
For the latest release, there was an increase in non-farm employment of 209,000 for July compared with expectations of just over 180,000. The unemployment rate also declined to 4.3% from 4.4% and equalled the lowest rate for over 10 years. Average earnings increased 0.3% which was in line with consensus forecasts and the strongest reading for five months.
Why is the employment report so important?
The monthly employment report is seen as the most important of all regular indicators. It does provide important evidence on trends on the US economy. The average earnings data is also an important indicator of tightness in the labour market and likely developments surrounding inflation trends. From a market perspective, the data influences expectations surrounding Federal Reserve policy.
The data provided an important lifeline to the dollar which recovered ground against all major currencies after heavy selling pressure early in the week. The dollar’s trade-weighted index recovered to above 93.50 from 15-month lows just above 92.50.
The UK economic data was mixed with the release of the latest PMI data. A stronger than expected reading for the manufacturing sector was offset by a significant downturn in the construction sector while there was a slight improvement in the services sector.
As expected, the Bank of England maintained interest rates at 0.25% at the latest policy meeting with a 6-2 vote as McCafferty and Saunders voted for a rate increase.
Although the bank reiterated that interest rates were likely to rise at a faster pace than indicated by market pricing, there was a small downgrading of inflation forecasts and no indication that a near-term increase in rates was likely.
In response, there was a sharp Sterling decline following the decision. EUR/GBP moved to 9-month highs above 0.9000 while GBP/USD retreated to below 1.3130 from highs above 1.3250 with a further slide to 1.3025 after the US employment data.
Headline Euro-zone consumer inflation was unchanged at 1.3% for July while there was a small increase in the core rate to 1.2% from 1.1% previously. Second-quarter GDP growth was reported at 0.6% from 0.5% for the first quarter.
Euro-zone developments overall were limited, especially with a peak holiday season getting underway in Europe.
The Euro corrected after the US data, but still registered marginal gains for the week as it closed around 1.1770.
The Reserve Bank of Australia left interest rates unchanged at 1.50% following the latest policy meeting and the central bank warned over a potentially damaging impact from strength in the Australian dollar.
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