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Odds improve for December taper

By Alex Edwards at  UKForex, an international money transfer service

It was a positive start to the week for the pound last week.   Manufacturing and Construction PMI both printed stronger than market expectations, the latter came in at 62.6 vs. expectations for 59.3, expanding at its fastest pace in more than six years.   GBP/USD advanced to three year highs and came close to breaking through 1.6450.   It then settled lower in to the end of the week as US data including ADP Non-Farm Employment and GDP printed stronger than forecasts, adding weight to the argument for a taper by the Fed as early as December/January.   Then US non-farm payrolls, a much anticipated release, hit the headlines and showed that payrolls in the US rose by 203,000 in November vs. expectations for 180,000.

The unemployment rate also fell to 7.0% vs. expectations for 7.2% which is especially positive given that the participation rate is increasing in the US jobs market.   If the Fed chooses not to taper in December it will likely be because of concerns over the low rate of inflation, not employment numbers, we think.   If not this month, the Fed may just signal an intention to taper in January.   GBP/USD is very well supported at 1.63 though – it is at least still holding above this level 30 minutes after the US jobs data.

The calendar for the week ahead is looking a little lighter with UK manufacturing and US retails sales being the main releases.   BoE Governor Carney is due to speak early in the week.

EUR/USD broke through 1.36  on Thursday  and traded to a high of 1.3675 following the ECB monetary policy announcement and accompanying statement.   ECB President Draghi raised 2014 GDP forecasts to 1.1% from 1.0% previously.   He also said that it was safe to expect inflation to remain low for a long period of time and that the ECB had not identified a specific instrument to manage the threat of deflation.   It was this that spurred the single currency on, an indication to the market that the ECB were not panicked by the low inflation rate.   Although the euro initially strengthened we do not think this will stave off investor fears over deflation in the medium term.   We are still relatively bearish on the euro and would expect EUR/USD to fall under 1.35 and even lower should US data continue to show signs of improvement throughout December and January.

AUD/USD drifted lower throughout the week last week.   Third quarter Australian GDP rose by 0.6% vs. 0.7% in the second quarter and compared with expectations for a 0.7% gain.   AUD/USD fell to a three month low.   On the one hand the RBA will be disappointed by the GDP print but on the other, relieved to see the AUD falling after stating earlier in the week that the Australian dollar was “still uncomfortably high”.   Next week we will hear from the RBNZ as they announce their decision on monetary policy and whilst no change in the OCR is expected we expect Governor Wheeler to make clear his concerns for stubbornly high house prices and rises in New Zealand.

Further reading:  5 reasons for QE tapering in December – NFP Analysis