For currency traders, the action heats up in the next 24 hours, with the European Central Bank and Bank of England monetary policy announcements on Thursday followed by U.S. and Canadian employment reports on Friday. Even though non-farm payrolls are traditionally one of the most market-moving events, we expect bigger moves for the euro and sterling on the back of ECB and BoE. Data’s primary value is to help investors anticipate changes in central bank policy. And with market expectations set for the Federal Reserve and Bank of Canada, this month’s U.S. and Canadian job reports should be less eventful.
The Bank of England, on the other hand, is expected to raise interest rates for the second meeting in a row. This would be the first back-to-back rate hike from the central bank since 2004. It kicked off its tightening cycle in December, when it raised rates from 0.1% to 0.25%. This move came as a surprise because the Omicron variant was spreading aggressively across Europe at the time, raising concerns about fresh lockdowns. Yet, inflation was clearly a big enough concern that it needed to overlook the near-term economic risks. Fast forward a month, and the case for further tightening is strong. Omicron did not cause the economic disruption that everyone feared. U.K. data remains firm, while price pressures continued to rise. At minimum, a quarter-point hike is necessary, with a small but realistic possibility of a half-point hike. The BoE has been one of the most hawkish central banks, and with the market looking for four rate hikes from the Fed, the Brits may step it up. That could come in the form of more aggressive tightening or a quarter-point move with very hawkish guidance. Even though GBP/USD verticalized this week. A 50bp hike could send the pair above 1.3650 towards 1.37. Initially, investors may be disappointed by a quarter-point hike, but the durability of any pullback in sterling will hinge upon additional guidance.
Investors have also been buying euros ahead of the European Central Bank rate decision. No changes are expected from the ECB, but the recent uptick in inflation has many traders pricing in a year-end rate hike. The most recent CPI report released this morning showed inflation growing at a new record high of 5.3% in January, up from 5% in December. Economists anticipated a slowdown, but the cost of living continues to rise. Although ECB President Christine Lagarde said last week the central bank has no reason to act as fast as the Fed, the pressure on the ECB to reduce stimulus is growing. Even a hint of hawkishness could be enough to drive EUR/USD to 1.14. But if she refuses to give into the pressure and downplays the need for tightening, EUR/USD will fall quickly and aggressively. Keep an eye on EUR/GBP for big movements tomorrow.
The U.S. dollar traded lower against all of the major currencies except for the New Zealand dollar after ADP said 301,000 jobs were cut in the month of January, the first reduction since December 2020. This decrease was significantly worse than the consensus forecast for 200,000 job growth and signals a potentially weak non-farm payrolls report on Friday. With the U.S. dollar falling steadily since last week’s FOMC rate decision, a disappointing jobs report will accelerate the decline. Most of the jobs lost were in the leisure and hospitality sector, but manufacturing and service sectors shed workers as well. If the employment component of tomorrow’s ISM services report also falls, we could see more U.S. dollar weakness.
Disappointing job growth in the fourth quarter led to weakness in the New Zealand dollar. There was a 0.1% increase in employment change, which is lower than the market’s 0.3% forecast, but the unemployment rate dropped to 3.2% from 3.4%. The global dairy index also eased to 4.1% from 4.6%. Canadian building permits fell more than expected, but the high level of oil prices kept the currency bid.