US dollar hit by a bit of yen and yuan

The FTSE100 managed to post its longest run of positive closes since 1997 yesterday, closing higher for the eighth day in succession while at the same time also posting a new record peak as well.

While this move to new highs has been slow and incremental in nature it hasn’t as yet been matched by the FTSE250, although it did manage to finish within a whisker of its record close of 18,342 from October last year.

The pound had a rather more mixed day declining against the euro but rising against the US dollar after the latest services PMI data for December showed economic activity at its best levels since mid-2015. The UK economy has continued to hold up well over the past few months prompting the surprise admission from the Bank of England’s chief economist Andrew Haldane that their Brexit predictions had been too pessimistic on the UK economy, acknowledging that apart from a brief hiccup the UK economy had carried on as normal.

Rising prices are a concern with oil prices near their highest levels in a year, which along with a weaker pound is pushing input and selling prices higher, however this isn’t only a problem here in the UK, it’s also a problem more globally as well, even if the weak pound has magnified the problem a bit more.

Yesterday’s sell off in the US dollar may well herald the beginnings of a corrective move lower, particularly given the suddenness of the move against the Chinese yuan and Japanese yen, as the US dollar index dropped sharply for the second day in succession , and posting a three week low in the process.

The shine also appears to be coming off US stock markets as once again the Dow failed to push above the much obsessed about 20k level that has thus far proved to be rather elusive. While the 20k level has no particular significance the failure to push through here appears to have prompted a loss of patience and some profit taking, after the latest US ADP employment report posted a rather disappointing 153k new jobs added in December.

This was down sharply from the 215k added in November, while we saw 169k new jobs added on the services side, on the goods producing side which generally tend to pay higher salaries we saw a fall of 16k jobs.

This may well go some way to explain the lack of wage growth as high value jobs are replaced by lower value jobs which pay less and while this was the only disappointing piece of economic data that we saw yesterday, with December ISM non-manufacturing also doing well, the internals of the ISM reported also showed some weakness in the employment components.

With that in mind and in light of the recent caution seen in this weeks Fed minutes is there a possibility that we could see the latest US employment report similarly disappoint when the numbers are released later today.

For the last two years the November and December jobs numbers have been pretty strong numbers due largely to large amounts of temporary hiring that takes place in the lead up to Thanksgiving and Christmas.

In 2016 this jobs growth hasn’t been on anywhere the same scale with ADP for December showing half the additional jobs from twelve months ago, while the November BLS numbers were also underwhelming, which might suggest that today’s number could disappoint. Expectations are for a number in the region of 180k, but it wouldn’t surprise if we came in below that.

Unemployment is expected to rise slightly to 4.7%, from 4.6%, while wages growth which was very week in November, declining 0.1%, expected to rebound 0.3%, with the annualised number expected to rise from 2.5% to 2.8%.

EURUSD – having broken back through 1.0520 the risk we could well see a move back towards 1.0700, despite this week’s new multi-year low at 1.0340. While below 1.0700 the prospect of a move towards parity still remains.

GBPUSD – having held above 1.2200 the pound continues to look susceptible to further gains through the 1.2500 area and potentially a move back towards 1.2700. The big support remains back at 1.2080 as we continue to range trade between 1.2100 and 1.2500.

EURGBP – resistance at the 0.8580 level held yesterday and while below here the bias remains for a move lower through the 200 day MA at 0.8350 to target a move towards the 0.8230 area. A move through 0.8580 argues for a return to 0.8700.

USDJPY – appears to be in the process of completing a potential double top formation with resistance at 118.65, and support at 115.50. A sustained break below 115.60 could well target a move towards 113.00.

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