The US dollar took a beating on Friday and will be searching for any kind of stabiliser this week in front of the Federal Reserve’s highly-anticipated monetary policy decision on Thursday. The US currency sank against all of its main rivals following Friday’s disappointing non-farm payrolls data which may just turn out to be the final piece of the Fed’s quantitative easing puzzle.
Expectations the Fed will now launch a third set of asset purchases to boost the job-shy US economy should dominate the week ahead and perhaps keep the US dollar tagged with a sell recommendation. But investors who have been busy scooping up more risky currencies to take aboard the Fed’s next “easy money” train may have to deal with some more disappointment first.
The European Central Bank kept to its promise of underwriting the euro by announcing an unlimited government bond-buying programme last week, pushing the single currency to 3 ½-month peaks against the US dollar. However, nervousness going into Wednesday’s German vote could spoil traders’ plans to keep tipping their portfolios to the more risky side.
Germany will decide whether or not Chancellor Merkel can keep making payments from Berlin’s public account to help safeguard the euro zone’s serial borrowers such as Greece. Athens’ finances may also be a hot topic this week, especially over in the Netherland’s where voters will decide on the next government.
In the midst of this week’s events in the US and Europe, investors will also examine what impact the latest economic fundamentals from China will have on the world economy. Beijing released another batch of worrying data on Sunday and early this morning which should keep the global growth story high on the agenda. In Britain, parties interested in Cable’s rise to four-month highs will be hoping for a dovish Fed on Thursday but will also need to keep a close eye on upcoming UK unemployment figures.
Sterling followed the crowd on Friday, trampling over a much weakened US dollar to reach four-month highs after fragile US employment data gave investors the clearest hint yet about the Federal Reserve’s monetary policy.
Traders, already on the front foot after the European Central Bank’s announcement on Thursday, poured into riskier assets on the growing prospect of the Fed adding another layer to its bond-buying supply at this week’s meeting.
Hopes of more easy spending money from the Fed could lead to further gains in Cable but investors could also turn wary of a different outcome.
Meanwhile, events in Europe this week, where Germany and Greece will be active, could also rock market sentiment which is likely to be the main influence on the pound. On the home front, investors will examine Britain’s latest unemployment figures mid-week which are forecast to show another month of stabilisation fuelled by hiring for the Olympic Games.
The walls closed in on the US dollar late on Friday, devaluing the greenback to four-month lows on a trade-weighted basis after the latest US jobs data gave the clearest hint yet that a third round of quantitative easing is inevitable.
The Federal Reserve appeared recently to have tied its hand on monetary policy to the country’s labour market; promising to launch more bond purchases, dubbed “QE3”, if substandard employment growth threatens the economy.
Friday’s non-farm-payrolls number for August missed estimates by some margin, keeping overall unemployment above 8% for almost four years now. Although, unemployment did fall from 8.4% to 8.1% last month, the dollar’s hammering since the data release is attached to expectations the Fed will land on QE3 this Thursday.
The US currency should therefore spend much of this week searching for any kind of help, with the usual euro zone jitters one probable source.
The euro’s gains following last week’s so-called “game changing” announcement from the European Central Bank is already looking vulnerable ahead of a court ruling in Germany this week.
The single currency earlier jogged to a two-month high against the US dollar after the ECB finally launched its new government bond intervention plan to help ease the crisis. The euro’s jog then turned into a sprint on Friday, surging to 3½-month peaks after below-par US employment data gave investors reason to expect more US monetary easing this Thursday. But despite being insured by the ECB, the euro may still suffer from discontent amongst euro zone politicians over the coming days.
In Germany, the Constitutional Court will decide whether or not Chancellor Merkel has the permission to contribute to a new-look bailout fund for Europe while Greece continues to do more talking than walking.
Reports suggest Athens has been unsuccessful in finding the spending cuts required for more financial aid; something that has also riled voters in the Netherlands ahead of this week’s vote.