by Dave Evans of binary.com
As is often the case during the first week of the month, markets have spent much of the last few days tip toeing around Friday’s US Non Farm Payrolls data release.
Traders were not disappointed by the release as a healthy 321,000 jobs were added last month, the most since January 2012 and the tenth consecutive month of +200,000 gains. This beat even optimistic assumptions from analysts who were looking for a net gain of 231,000.
The dollar index has been chomping at the bit to push higher and Friday’s jobs data was enough to set the Greenback on course for its sixth straight month of gains. The prospect of an interest rate hike is the main catalyst for this push higher, while the Fed turns off the Quantitative Easing taps.
While the employment rate is important, it is not the only factor that the Fed is weighing up in their decision on when to raise interest rates in 2015. Just as in the UK, while US employment and GDP have impressed, wage growth has stagnated. Average hourly earnings are still just 2.1% higher than they were a year ago, still well below the 3% target that the Fed is looking to achieve. Average wage growth does seem to be picking up, but many economists are questioning whether it is enough to push a rate hike forward from the middle of 2015 as is the current census.
Forex markets appear to be making their own mind up however, the dollar index closing up the week around 1% higher and the USD/ JPY notching gains of nearly 2%.
US dollar Index
Riding the USD/JPY until it stops
The USD/JPY has now made sizeable gains for the last seven weeks and while this cannot last forever, it would take a brave man to fight the tide of this trend. We took a bullish bet on the USD/ JPY as we have for many of the previous weeks and will keep humming the same tune until the pair shows a significant reversal.
The dollar has not risen in a vacuum. It’s rise has come at a time when its principle trading counterpart, the euro, has been slipping lower and lower. At the same time commodities have been soft, especially oil, but there’s no getting past the weak growth prospects for the Eurozone and by consequence the EUR/ USD.
EUR/ USD daily chart
On Friday, the Bundesbank deflated the EUR/USD further by halving its forecast for German growth in 2015 to 1%. There were hopes that Germany would lead the Eurozone recovery, but its economy has contracted then expanded weakly throughout 2014.
The ECB still has room to cut rates further on top of the proposed Quantitative Easing measures and they may need to with German inflation falling short of the target of 2% until 2016. That the strongest member of Eurozone block is sliding into stagnation may be enough to finally push the ECB into bold action instead of bold announcements.
As such, there is still significant downside potential for the EUR/USD moving into 2015.
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