A week that was anticipated as being a strong week for the US dollar had a lacklustre ending courtesy of a mixed employment report on Friday. Many people are left scratching their head wondering why the dollar weakened when NFP slightly exceeded expectations, but there were very good reasons. Despite the strong reading previous month NFP was revised downwards by over 20 K, and while unemployment unexpectedly fell to its lowest level since 2006 at 4.6%, average hourly earnings actually fell by 0.1%, and this is a closely watched figure by the Fed. So while this is unlikely to have any significant impact on an interest rate hike later this month, with futures still pricing in a 100% chance, it is felt that this somewhat weaker report will have an impact on the pace of increases next year. Looking at the CME group futures it isn’t until June next year where we see a reasonable expectation (40%) of another interest rate rise.
The report weighed heavily on the US dollar on Friday and significantly impacted on gains made earlier in the week from positive Durable Goods orders, GDP, Chicago Board confidence figures and ISM manufacturing PMI. All of these were positive but collectively not able to support the dollar following the employment report. With a quiet week next week the US dollar is expected to stay largely range bound unless we have any significant policy announcements from President-elect Trump.
The single currency has had a bit of a resurgence like the following relatively good data releases and the ECB president continuing to site signs of economic stability and improvement. German retail sales significantly beat the 1% forecast coming in at 2.4% with Eurozone core CPI and CPI also delivering against expectations. Manufacturing PMI was also reported this week at a 34 month high as well as unemployment reported at 9.8%, the lowest for 7 years. In his speech to the European Parliament on Monday ECB president Draghi repeated recent comments that the Eurozone economy continues to expand at a moderate pace despite adverse effects of global economic and political uncertainty. He went on to say that he remained confident that this would continue and that the ECB monetary measures were having the desired effect. Next week we see the ECB Council meeting where monetary policy decisions will be announced, and it is highly anticipated that there will be an announcement on the future of the existing bond buying programme due to expire next March. If the economy continues to improve then tapering of the QE program will start to be discussed, but there is a real risk of encouraging a sell-off in the Euro unless that is handled extremely carefully.
The biggest threat to the Euro at the moment is the Italian Constitution referendum due to take place this Sunday (the 4th). While not a referendum on Europe itself, the vote, related to reducing powers of the Italian Senate, has been seen as a significant risk to the Eurozone. Steaks were increased when Prime Minister Renzi threatened to resign if he was defeated, and should he follow through with this there will be more concerned around the rising right-wing sentiment and anti-European feeling in Italy. While there are no opinion polls legal within 15 days of the vote, the most recent data available suggested that the government was behind, and should the Prime Minister follow through with his resignation threat this would cause significant economic and political turmoil in Italy, already struggling with a banking crisis, and subsequently the Eurozone.
This risk alone, along with French and German elections also scheduled next year, is what many analysts are citing as the reason for parity between the Euro and US dollar currencies.