Despite Feb US labor report which has shown lower unemployment rate than expected at 8.9% and adding 192k in the US non-farm payroll but the Dow could not add more gains closing the last session of the week losing 88 points as the investors have been already buying in the past days expecting better added jobs number since the weekly jobless claim has declined a day by the release of the US labor report to 368k from 388k while the market was waiting for rising to 400k and this remarkable declining came out after the release of Feb US ADP Employment change of February which rose to 217k while the market was waiting for 184k from 187k in January. The investors tended to take profits than buying taking more risks after the release of US non-farm payroll of February which was expected initially to be 180k from just 36k in January and 192k was not encouraging enough to overcome the threats of the rising commodities and energy which are containing the market sentiment weighing on the business spending currently and triggering worries about how long the Fed's will hold its stimulating easing policy which is eroded currently by the rising of prices which tackle the demand moving the growth up as Fed's Chairman Mr. Bernenke warned recently that if the prices will continue rising, there will be negative impact on the recovery but until now, there is no direct statement about a possibility of taking a tightening action by the Fed's for containing the prices on these threats which putting the greenback under pressure specially versus the single currency which is well underpinned by growing market expectations of having at least 2 interest rate hikes this year after the ECB came back to say it again after it has not been hear out from the ECB press conferences after its members meetings for determining the interest rate that it is strong vigilance warranted to watch the prices and this familiar statement to the money managers which has not been said since 2008 when the prices were rising before the credit crisis was to prepare the markets for to a tightening action by ECB to come next meeting.
The ECB president Mr. Trichet has extended adding that the bank sees the inflation will be from 1% to 2.4% next year which means that the ECB can enter new cycle of tightening its monetary policy for containing the prices to reach this while we have reached its ceiling up last months when the EU CPI reached 2.4% y/y.
The market has had the sentence as turning to tightening finally for containing the prices which have been fueled recently by the rising of commodities and energy prices with the tension in the middle East and specially Libya which is one of the most important and nearest oil and gas suppliers to Europe giving Italy 35% of its needs of gas.
The single currency was strong enough to reach 1.4 psychological level after getting over the US jobs data impact as the next barrier to meet after getting over the recent peak at 1.386 easily on Trichet's comments and if the market will continue putting aside the debt worries in The Euro zone and the direct negative impact of tension in Libya on the euro zone countries and specially Italy focusing on the interest rate outlook differential, this can help the single currency to have more pressure on the greenback trying to get back to 1.4281 which has been reached in the beginning of last November when the greenback was under pressure from the Fed's decision to add another 600b$ in another step of its QE policy for stimulating the economic growth in US and until now and as we have seen this week from Bernanke's testifies which have shown the Fed's existing worries about the jobs market and the need for supporting it and in the same time he has just mentioned the negative impact of the commodities and oil prices rising which can tackle the Fed's easing steps and US recovery hoping that to be temporary and well contained over the long term not even the medium term which is not looking good for the greenback or its interest rate outlook by God's will.
The sterling could not again catch up with the single currency rising versus the greenback after breaking its previous resistance at 1.6296 satisfied by being around it out of momentum to continue rising until now as it is still contained by the down revision of UK Q4 GDP quarterly from -.5% to -.6% and the signs of growth down side risks which cap BOE from tightening and the release of February Confederation of British industry survey of the retails sales was the bets figuring out of this stagflation case facing the BOE as it has fallen to 6 from 37 in January to ensure the market worries about the growing pace of the demand which is moving the growth up and in the same time the figure of the selling prices inside the retail sales sector has shown strong rising from 43 in January to 73 in February which shows the need of tightening too and so there was no major change yet from the MPC as we have seen recently the minutes of its recent meeting showing that there are three ways of the members as Mr. Dale has given his vote to hike the interest rate by .25% like Mr. Martin Weale and Andrew sentence has called for hiking by .5% while Possen was the only vote for increasing the buying bonds plan by another 50b Stg while the other 5 MPC voting members including BOE president Mr. Mervin King preferred leaving the interest rate unchanged keeping BOE 200b Stg buying bonds plan unchanged and this mixed position is reflecting the performance of the sterling too which rise currently when it finds signs of inflation and quickly get back under pressure with the signs of economic weakness and both directions signs are existing containing the sterling movements!
FX Market Strategist
Walid Salah El Din