Sterling Drops on Unexpected Rise in Unemployment Rate, Dollar Firm ahead of FOMC Minutes

Dollar stays firm and is trading broadly higher going into US session. FOMC minutes will be closely watched later in the session. But it’s unsure how much boost the hawkish Fed could give Dollar. For the moment, the greenback is staying below near term trend definite resistance against all other major currencies despite this week’s rebound. That is, Dollar remains in down trend and the rebound is viewed as a correction only. Elsewhere in the currency markets, Sterling is trading broadly lower as job data showed first rise in unemployment rate since 2016. Wage growth met expectation but stayed below inflation.

UK unemployment climbed for first time since 2016

UK jobless claims dropped -7.2k in January, better than expectation of 2.3k. However, unemployment rate rose to 4.4% in the three months to December, above expectation of 4.3%. That’s the first rise in unemployment rate since August 2016. Unemployment jumped 46k in the final quarter of 2017, sharpest increase in almost five years. Average weekly earnings grew 2.5% 3moy, in line with consensus. However, wage growth continued to be lower than inflation. Also from UK, public sector net borrowing dropped to GBP -11.6b in January.

ECB Vasiliauskas: Nobody expects sudden end to asset purchase

ECB Governing Council member Vitas Vasiliauskas said that recent rise in Euro is "quite a normal reaction". And, "it’s the outcome of the strong euro zone economy." Also, "the economy is improving and markets expect higher inflation in the medium term". Regarding the asset purchase program, Vasiliauskas said "nobody expects a scenario with a sudden end to the programme. Especially having in mind the experience of other central banks. You don’t want to take steps forward then back, so we should be careful in making (a) decision."

Eurozone PMI showed mild cooling in expansion

Eurozone PMI manufacturing dropped to 58.5 in February, down from 59.6 and missed expectation of 59.2. Eurozone PMI services dropped to 56.7, down from 58, missed expectation of 57.6. Germany PMI manufacturing dropped to 60.3, down from 61.1, missed expectation of 60.5. Germany PMI services dropped to 55.3, down from 57.3, missed expectation of 57.0. France PMI manufacturing dropped to 56.1, down from 58.4, below expectation of 58.0. France PMI services dropped to 57.9, down from 59.2, missed expectation of 59.0.

Markit noted that "Eurozone business activity continued to rise at a steep pace in February, albeit with the rate of expansion cooling from the near 12-year high recorded in January." Regarding Germany, Markit noted that "while February’s flash PMI figure was down on January’s recent high, it still continued to point to a robust pace of private sector expansion in the Eurozone’s largest economy."  Regarding France, Markit also noted that "private sector growth in France shifted down a gear in February, with the rate of expansion in output and new orders each hitting four-month lows."

Japan PMI: Yen appreciation dragged export growth

Japan PMI manufacturing dropped to 54.0 in February, down from 54.8 and missed expectation of 55.2. In particular, new export orders index dropped notably from 57.4 to 54.0, hitting the lowest level in three months. Markit noted in the release that "recent yen appreciation has coincided with slower new export order growth." Also, "a number of panelists indicated that the stronger currency had prompted them to lower prices to overseas customers." And, "further yen strengthening will create unwanted drag on inflationary pressures". Also from Japan, all industry activity index rose 0.5% mom in December.

FOMC minutes to turn more hawkish

It’s generally believed that minutes of the January 30-31 FOMC minutes would show a hawkish twist in the languages The questions is just on the extent. Recent solid data, including job and inflation, are solidifying the case for three rate hikes this year. And markets would now wand to see if more board members are starting to considering four hikes. That would also be tied to policymakers’ view on the impact of the tax reform. In addition, markets will look at whether Fed officials are getting more comfortable with the inflation outlook.

Dollar has so far received no support from surging treasury yields, Fed hike expectation, nor the tax reform this year. There is doubt on whether the FOMC minutes could give the greenback sustainable strength. We’ll keep an eye on it.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3942; (P) 1.3983; (R1) 1.4036; More….

GBP/USD’s fall from 1.4144 extends lower today but it’s so far staying in range of 1.3764/4144. Intraday bias remains neutral first. On the upside, break of 1.4144 will extend the rebound from 1.3764 and target a test on 1.4345 resistance. Break there will resume larger up trend and target long term trend line resistance (now at 1.5105). On the downside, below 1.3764 will extend the correction from 1.4345 to 1.3651 resistance turned support instead.

In the bigger picture, as long as 1.3038 support holds, medium term outlook in GBP/USD will remains bullish. Rise from 1.1946 is at least correcting the long term down from 2007 high at 2.1161. Further rally would be seen back to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466. However, GBP/USD fails to sustain above 55 month EMA (now at 1.4279) so far. Break of 1.3038 support, will suggests that rise from 1.1946 has completed and will turn outlook bearish for retesting this low.

Economic Indicators Update