After a short-lived drop in the dollar following the unexpected rate hike from the Bank of England, the U.S. dollar receives a strong boost from the unexpectedly low reading in weekly jobless claims, suggesting further stability in U.S. labor markets. Weekly jobless claims hit a five-month low to 299,000 last week, well under expectations of 320,000. The four-week average fell to an eight-week low of 314.8K. Despite the possibility that the low claims reading may be impacted by New Year holiday distortion, the data fit with last week’s stronger than expected payrolls figures, and further dissipating the notion of a first quarter Fed Funds rate cut.
Also boosting the dollar is a today’s European Central Bank press conference, in which Bank President Jean Claude Trichet omitted the qualifier "strong vigilance" on his inflation stance in the opening statement, sending a signal to the markets that a February rate hike is not guaranteed. In the past, Trichet has often characterized the central bank’s inflation stance as “extremely vigilant” or “strong vigilance” when signaling a rate hike into the subsequent month. This leads us to conclude that Trichet has chosen not to fuel renewed euro strengthening at a time when the Euro zone economy is expected to have cooled in the first quarter from the fourth quarter's 0.8% rise partly due to the 3% rise in the VAT in Germany and overall slowdown in the United States. A pause in February does not rule out a rate hike in March or later in the second quarter, especially since the ECB continues to be accommodative and keep interest rates low. Expectations for an ECB rate hike remain considerably high, especially as long as the Fed is not forced to cut rates in H1.
Friday’s U.S. retail sales could extend the dollar’s gains, enforcing the theme of consumer led demand cushioning the economic soft landing. A reading greater than 0.5% in headline and core sales coupled with this week’s 1.0% drop in the November trade deficit could add as much as 0.7%-0.8% to fourth quarter gross domestic product, when the report is released later this month.
Prolonged dollar gains seen dragging the EUR/USD towards the 100-day moving average of 1.2875, followed by 1.2845—the 61.8% retracement of the rise from the Oct. 18 low to the Dec. 4 high. Upside remains capped at 1.2980, followed by 1.3040.
The Bank of England rate hike is seen cushioning any renewed declines in sterling at the $1.94, followed by 1.9360. Resistance starts at 1.95, with increased pressure at 1.9550.
Easier for OPEC to lift prices than to cut them
The most immediate downside risk to the dollar remains a rebound in oil prices, driven by cold weather or OPEC rhetoric. OPEC's President Mohamed Al Hamli has already fueled speculation that the cartel could make a bigger than planned supply cut after he described oil's plunge to $53 a barrel as “unacceptable.” Although Al Hamli said he urged members to comply with the pledged production cuts of 500,000 barrels next month, it remains to be seen how the balance of power shifts in the 12-nation cartel. A rebound towards the $57-59 figure would likely bring back central bank buying of euros, and help cap USD/JPY at the 121 figure.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 fax
a.laidi@cmcmarkets.com
