Market Sentiment Muted, and Dollar Holds Firm

Fundamental analysis of Forex market

Markets prepare for ECB Lagarde as calmer tone overshadows prior rollercoaster week

Moving past the previous heavy week of data, this one looks to be much quieter. The market mood is suggesting that the right boxes are getting ticketed for the Fed to move ahead with tightening and a rate hike in March, especially after the huge win in the US labour sector, where the US jobs report improved by 467k, more than quadrupling expectations of 110k in January.

More jobs were created in the hospitality, transportation, professional services and retail trade, despite Omicron pressures and average hourly earnings in January also heated up to 0.7%, beating expectations, and last month’s figure of 0.5%, hinting that wage growth could maybe start to play a major part in inflation.

The US economy is firing on all cylinders with stronger US manufacturing and services PMIs, which now makes Thursday’s US inflation data at 13:30 GMT that more significant for those policymakers that seek aggressive hikes to curtail growing inflationary pressures.

Nonetheless, with interest rate global rhetoric from central banks gaining more fans as the world starts to look at the coronavirus pandemic in its rear mirror, it will be interesting to see which economies start to outperform.

US stock futures are flat, and the greenback remains on the back foot in the forex arena at the beginning of this week. The dollar index has stabilized, finding its feet around the 95.40 level after a decline that began at the end of January from 97.41. Gold is faring well at $1,815/oz given the rise in the 10-year yield to 1.92% following Friday’s US payroll report shock. Keep in mind the 2-year yield also remains elevated at 1.33%. The elevated rates have kept the pound on the back foot but not so much the euro, especially after the BoE and ECB hawkish stances.

The yen is sustaining its broader neutral-to-bullish tone but has slipped just beneath the 115.00 per dollar mark intraday wise, with the swiss franc strengthening a tad, driving the USD/CHF pair lower to 0.9230.

Sterling resilience and ECB President Lagarde at centre stage

The euro has returned to Asian session levels of $1.1460, consolidating slightly below its mid-January high of $1.1480 after ECB President Lagarde commented last week on a possible hike this year, which has nudged market tightening expectations higher. The pair is consolidating in this region ahead of the scheduled hearing where madame Lagarde will speak before the European Parliament Economic and Monetary Affairs Committee at 13:45 GMT. So given her previous comments there could be some movements in the euro today.

The pound has recouped 50% of its 60 pip intraday losses and is standing at $1.3520 after a large miss in the Halifax house price index (HPI), which came in at 0.3%, compared to January expectations of 0.9%.

Despite highest inflation in 30 years, the UK’s employment is strong, and the economy has dealt well with the Omicron variant, shown in the UK retail sales. The first back-to-back hikes since 2004 to 0.50% from the Bank of England has failed to underpin the pound for now, with rising cost pressures weighing on households.

The EURGBP cross stretched to the 0.8470 level.

Oil and the antipodeans ahead

The antipodean currencies were the best performers today with the aussie up 0.61% just above 0.7100 per dollar, and the kiwi up 0.31% at 0.6623 per dollar at time of writing. WTI oil futures at $92.40 per barrel have returned near Asian trading session levels.

ECB President Lagarde is scheduled to speak at 15:45 GMT.