As the market awaits the last unemployment report of the year at 1.30pm today some in the market are asking themselves why the US dollar didn’t rally yesterday.
Many would have though it would seeing the following headlines flash across the screens yesterday, revised 3Q US GDP print coming in at 3.6% better than the expected 3.1% and the initial print of 2.8%. This was in addition to watching ECB President Draghi cut his expectation of Euro zone inflation which usually results in looser monetary policy leading to lower rates and a weaker domestic currency.
So why was the $ not stronger? Firstly looking behind the headline GDP number showed that the majority of growth came about from a build up in inventories i.e. goods that weren’t sold over the quarter, this tends not to bode well for future quarters US growth. Secondly on the ECB, although inflation was revised down Draghi managed to sound less dovish than what the market had expected. When you sit and compare this to the uber dovish FED maybe its not so surprising to see the Euro appreciate yesterday
So moving the focus back onto today the market looks for clues sounding the question of “When will the FED taper?” As we go into today’s employment data many view this as the most significant release for a while and it probably is but I’ll caveat that with the market always does!
So going into the employment data despite the improving US data I go with the taper as a theme for 2014 even if we get a big number on the Non-Farm payrolls (market expectation 185k) as the market waits for further signs that the growth momentum is increasing.
On the currencies any near term USD strength may have to wait until the New Year so both the EUR and GBP are likely to continue their ascent against the USD for the time being! In my last USD blog back on the 28-Oct-13 I was looking for 1.6500 in GBPUSD and 1.4000 in EURUSD. We have made progress thanks largely to the growing optimism in the UK and the dovishness of the FED so I continue to hold that view into year end.
However the New Year will bring new fortunes for the USD and although I don’t foresee any tapering decision made in the 18th December FOMC meeting I do believe the minutes for that meeting on 8th January will indicate an imminent decision and will provide the spark for Q1 2014 strength similar to what we experienced in 2013.
If we think back to the start of 2013 its worth remembering George Santayana’s quote “Those who do not remember the past are condemned to repeat it.”