Daily currency analysis
The dollar found support close to 1.4775 against the Euro on Thursday and strengthened back to challenge the 1.47 level following the US data releases. The US currency was unable to sustain the gains and returned to the 1.4750 area later in US trading. The dollar gained only slight support from the UAE announcement that it would retain the existing US currency peg.
According to the ADP employment report, private-sector jobs increased by 40,000 in December after a revised 173,000 increase for November. The increase is consistent with a payroll increase of around 65,000 and certainly suggests a significant underlying slowdown in the labour market. There were, however, fears of a worse outcome following the ISM data which provided some temporary dollar relief.
Elsewhere, jobless claims fell to 336,000 in the latest week from 357,000 previously while factory orders rose by 1.5%. Markets are still very confident that interest rates will be cut again this month and there is still speculation over a 0.50% cut which will hamper the dollar.
A weak payroll report on Friday would reinforce expectations of an aggressive Fed policy to cut interest rates, particularly if there is a negative figure. The household survey will also be watched closely for evidence on the labour market trends.
The further decline in German unemployment of over 70,000 for December will help support confidence, although there will still be underlying concerns over Euro-zone growth trends. The Euro-zone consumer inflation data will be important on Friday and any dip below 3.0% would provide some reassurance to the ECB.
The yen initially consolidated near 109.55 against the US currency in European trade on Thursday, but dollar rallies were still being sold into as underlying confidence remained fragile. Subsequently, the yen strengthened rapidly to a five-week high of 108.30 before retreating to 109.30 in choppy US trading.
Tokyo markets will reopen on Friday and evidence on retail trends will be watched closely. A resumption of carry-trade interest would tend to weaken the yen to some extent, although caution is likely to prevail.
High oil prices should be a negative yen factor given the import implications. There will also be increased fears over the global growth outlook which will tend to support the Japanese currency as risk conditions will tend to dominate.
The UK currency remained firmly on the defensive during Thursday with fresh record lows near 0.7485 against the Euro. The UK currency also dipped to lows near 1.97 against the US dollar and was unable to sustain a limited recovery.
A firm PMI construction report failed to lift the gloom with Sterling undermined by the Bank of England credit survey. The report indicated that mortgage and business credit conditions had tightened in the fourth quarter and were likely to tighten again during the first quarter which will undermine activity.
Sterling confidence is likely to remain fragile on growth fears, especially with increasing fears over the implications of rising personal debt. The services-sector PMI index will be important on Friday, especially as this sector will be more sensitive to the impact of a credit tightening and a weaker financial sector.
A depressed reading would increase pressure for lower interest rates, especially if the prices index is lower in the data. Evidence of robust consumer spending would still provide some near-term support to the UK currency, although initial reports have been mixed.
The Swiss franc retained a firm toe against the Euro on Thursday with gains to 1.64 and also strengthened to highs near 1.1100 against the US dollar. Risk aversion levels remained high over the day which maintained investor demand for the Swiss currency as Wall Street was unable to sustain rally attempts.
The Swiss PMI index weakened to 61.3 in December from 63.4 the previous month. This was still a robust figure in historic terms and underlying confidence in the domestic economy should remain firm.
The Australian dollar has maintained its ground against the US dollar over the past 24 hours with a test of resistance levels above the 0.88 level. The Australian currency weakened sharply against the yen, although the underlying performance was still relatively firm.
The Australian dollar will gain short-term support on yield considerations while the strength of commodity prices will also help underpin the currency. There will, however, still be important Australian dollar risks surrounding a weaker global growth outlook and caution over carry trades will also limit currency demand.