GBP shot higher after the Bank of England’s monetary policy announcement. The BoE voted unanimously to leave monetary policy unchanged. Some investors thought there would be dissent because a few policymakers favored negative interest rates. Although, the BoE told banks to start preparing for negative interest rates, they also stressed that the move may not be necessary. This step should have driven GBP lower because it moves them closer to negative rates but the central bank was also more optimistic about growth. They lowered their 2021 GDP forecast due to the lockdown in the first quarter.
Investors have been bidding up USD all week and now they are wondering if Friday’s non-farm payrolls (NFPs) report could drive EUR/USD to fresh 2 month lows or USD/JPY above 106. NFPs are the most important piece of data for the US this week but over the past year, we’ve seen a diminishing impact on currencies. That mostly had to do with vaccine optimism and how it led investors to shrug off weaker numbers. However this month, non-farm payrolls are expected to improve with job growth returning. In December last year, 140,000 jobs were lost and tomorrow, US companies are expected to restore 50,000 jobs. There are many reasons to expect a stronger release that should encourage further gains in the greenback.
The jobless claims report showed the 4 week moving average dropping to its lowest level in 2 months and continuing claims at the fewest since March last year. The employment component of the manufacturing and service sector ISMs returned to expansionary mode last month as ADP reported a sharp rise in private payrolls. Consumer confidence was mixed with the conference board reporting improvement and the University of Michigan reporting deterioration. Still there are enough reasons to believe that Non-Farm Payrolls will rise more than 50,000 but will that be enough?
Typically when data validates market sentiment the impact on the market can be more significant. In this case, USD could respond particularly well to a better than expected NFP report. It won’t take much for EUR/USD to fall to fresh lows and possibly test 1.19 but USD/JPY moves more slowly and 106 may be a challenge to reach with the 200-day SMA and November high converging near 105.60.
CAD is also in focus on Friday with labor and manufacturing data scheduled for release. Like the United States, Canada experienced job losses at the end of the year. However, they are not expected to return to job growth. If that’s true, then good US data coupled with job losses in Canada would be the perfect catalyst for a stronger recovery in USD/CAD that could set the stage for a broader move towards 1.30. AUD and NZD also pulled back despite a bigger trade surplus for Australia and stronger increase in building permits for New Zealand.