Dollar Extends Gains On Hints Of Job Recovery, BoE Next

The US dollar traded higher against most of the major currencies today on the back of better than expected data and an uptick in Treasury yields. Ten-year Treasury yields rose more than 4% while the 30-year rate rose to its highest level since March 2020. Vaccine optimism continues to keep US assets in demand but the sharp rise in ADP and higher ISM services report helps as well. The employment component rose to 55.2 from 48.7, a sharp improvement that represents a return of jobs. With non-farm payrolls scheduled for release on Friday, today’s reports give us plenty of reasons to expect hiring to resume at the start of the New Year.

10 and one 10 us dollar bill

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The Bank of England meets on Thursday and the focus will be on forward guidance. Despite Brexit and a dangerous virus mutation, economic data hasn’t been terrible. There’s no sugar-coating the fact that the economy is still very weak but most economic reports surprised to the upside. Still, with the UK composite PMI index at 41.2 in the month of January, the economy is in a deep contraction. The Bank of England has no plans to alter monetary policy but they’ve been toying over the possibility of negative interest rates for the past few months. In mid-January, Governor Bailey dampened negative rate expectations when he said there were lots of issues with cutting interest rates below zero. Sterling’s general resilience tells us that investors are not too concerned because Britain is leading the world in getting their citizens vaccinated. At 14%, they have the third-highest vaccination rate behind Israel and the United Arab Emirates. Prime Minister Johnson even said today that it feels like they could ease national restrictions soon. If Governor Bailey continues to downplay the need for negative rates, sterling will sustain its gains but if he sparks renewed speculation about the possibility, GBP/USD will fall quickly and aggressively.

Euro extended its slide against the US dollar despite better than expected economic data which goes to show that once sentiment shifts, it can have a lasting impact on a currency. Eurozone PMIs were revised higher in the month of January but the big surprise was inflation which jumped at the start of the year. The annualized core inflation rate rose from 0.2% to 1.4%, easily surpassing the 0.9% forecast. While inflation is always a concern for the central bank, central bankers don’t expect this increase to last. Eurozone retail sales are scheduled for release tomorrow and given the sharp drop in Germany, the risk is to the downside for the regional release.

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