Euro to Dollar Rate Not in a Position to Challenge 1.10

January 4, 2024 - Written by James Fuller

STORY LINK Euro to Dollar Rate Not in a Position to Challenge 1.10

The dollar was unable to make any headway against European currencies ahead of Thursday’s New York open, but posted tentative net gains following stronger than expected US jobs data.

Following the US data, the Euro to Dollar (EUR/USD) exchange rate retreated to 1.0940 from 1.0970, but selling was limited as equities resisted significant selling.

Latest ADP data recorded an increase in private-sector payrolls of 164,000 for December compared with consensus forecasts of 115,000 and following a downwardly-revised 101,000 the previous month.

According to the ADP, last month brought moderate growth in hiring and another slowdown in pay gains. Both goods and services saw weakness, with leisure and hospitality and manufacturing posting declines.

As far as wages are concerned, the annual increase slowed further to 5.4% from 5.6% and the lowest figure since August 2021.

ADP chief economist Nela Richardson commented; "We're returning to a labor market that's very much aligned with pre-pandemic hiring."

She added; "While wages didn't drive the recent bout of inflation, now that pay growth has retreated, any risk of a wage-price spiral has all but disappeared."

Given the impact on inflation, the Federal Reserve will welcome a further easing of wage pressures.

Initial jobless claims declined to 202,000 in the latest week from a revised 220,000 the previous week and below consensus forecasts of 216,000.

Continuing claims also declined to 1.86mn from 1.89mn the previous week.

Although the Federal Reserve will take some comfort from the wages data, the overall labour-market data is unlikely to prompt any talk of an early rate cut within the central bank.

Following the data, Treasuries lost ground with the 10-year yield increasing to near 4.00%.

Markets were still pricing in around a 65% chance that rates will be cut at the March policy meeting.

Higher yields, however, were important in providing dollar support in global markets.

Overall risk conditions will also be important for currency markets.

According to ING; “The dollar is once again more expensive to sell with 10-year Treasuries again close to 4.0%, and the predominance of equity/global risk sentiment as drivers for FX markets means that the dollar dynamics remain strictly tied to markets reassessment of stock market levels.”

The dollar will tend to strengthen against European currencies if equities come under pressure.

Bourses overall were little changed after the US data, but Wall Street will be watched closely.

The Dollar to yen (USD/JPY) exchange rate posted 2-week highs around 144.50 following the jobs data.

The US employment report will be released on Friday with consensus forecasts for an increase in non-farm payrolls of 170,000.

MUFG commented; “Given yields have now drifted back a little higher and the probability of a March rate cut has come down, the hurdle for rates and the dollar to decline is a little lower now. Still, we believe a modestly stronger than expected jobs report will certainly have a bigger rates and FX impact than a modestly weaker than expected report.”

ING added; “we suspect that expectations for a respectable payrolls print tomorrow will prevent large USD corrections.”

German consumer prices increased 0.1% for December with the year-on-year increase increasing to 3.7% from 3.2% and in line with market expectations.

Geo-political developments will also be potentially important in the short term.

Markets will be watching Middle East developments with a particular focus on oil prices.

MUFG commented on developments in energy markets. It noted; “The annual change in crude prices is currently in negative territory. Still, if Middle East tensions escalate further and we see increased conflict incorporating Iran, then we may see some larger spikes higher that may prompt some increased central bank caution.”

It added; “The link between crude oil prices and US retail gasoline prices are tight and a sustained move higher would possibly prompt caution from the Fed.”

As well as making Fed rate cuts less likely, higher oil prices would also tend to undermine confidence in the Euro-Zone economy.

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TAGS: Euro Dollar Forecasts