Data inconsistency fails to deter traders
The U.S. employment report, which was released on Friday showed that 148k new jobs were produced in December versus an expectation of 190k while the November figure was revised up from +228k to + 252k. If nothing else, this illustrates perfectly the nature of the data and that it is difficult to imagine that such an unreliable piece of data has such a profound effect on both traders and officials.
The dollar index, which had been flirting with its lows all week managed to recover a little trading above the 92.00 level. San Francisco Fed. President and FOMC member John Williams was quoted as saying the he saw sufficient reason, driven by both the effect of tax cuts and job growth for the Fed to raise rates three times in 2017 although the futures markets are so far predicting two with the first in March. That remains to be seen given the benign nature of consumer prices and the fact that there has been no change in wage inflation for several months, remaining stuck at 2.5%.
Inflation data will be released later this week and it is expected that core CPI will reach 1.8%. A rise on November but still shy of the Fed’s 2% target.
Sterling still awaits Brexit
There is 'only one game in town' when it comes to the influences on sterling. Since the 'euphoria' of a deal to move to stage two of talks died down, sterling has been in reactive mode. Even the prospect of a reshuffle of Theresa May’s Cabinet today has failed to shake the tauper. This could also be because it is well known that even as Mrs May changes the faces of her Cabinet, their outlook will remain the same.
Given the precarious state of her government propped up by Northern Irish MP’s, May cannot settle upon a Cabinet that is mainly dovish towards Brexit, but neither is she able to cede too much ground to the likes of Boris Johnson, Michael Gove and Liam Fox who are decidedly hawkish about the prospect of a hard Brexit.
Sterling has managed to hang onto gains versus the dollar which faces its own headwinds managing to consistently stay close to its highest level since the Brexit referendum. Against the common currency, the pound has gained a little since the agreement to move to stage two but that could easily evaporate as Brussels turns the screw a little more.
Politics and inflation to drive euro
The eurozone-wide inflation data that was released on Friday was a little stronger than market expectations, which when added to the slightly more hawkish comments from ECB members has given a slight boost to the euro. It has now formed a strong base above 1.2000 versus the dollar and if ECB President Mario Draghi agrees with his colleagues about the need for additional stimulus to be removed, the multi-year high at 1.2520 could come under threat in the coming weeks.
With the Italian election less than two months away and Germany still unable to form a coalition Government, politics could create some headwind but unless there is a serious threat to the single currency from the Italian opposition parties, the threat of tighter monetary policy should prevail.