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USD appetite returns

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After a few days unexpected softness due to a “risk on” sentiment from investors, traders are returning to the USD after receiving clarity that the Federal Reserve will still be raising US interest rates this year following a stronger than expected NFP result. The United States added another impressive 257,000 jobs to its economy in January, far higher than the general consensus for just over 210,000. There were some concerns over the US economy slowing down and pushing back expectations for the Federal Reserve to begin raising interest rates, but what people are forgetting is that the Federal Reserve has previously continuously highlighted employment and inflation data as the focus for them anyway.

While it may be true that the economy is encountering reduced momentum, it was always completely unrealistic to not expect reduced growth after the previous quarterly GDP was confirmed at an annualised 5%. The recent durable goods, factory orders and manufacturing sector has led to concerns GDP estimates will be lowered and that is acceptable, but what the data over the past week has really shown to traders is that any expectations for the FOMC to begin raising interest rates as early as April/May is still ambitious and we are still looking at September as a likely time for a rate rise.

Due to optimism that the Federal Reserve will raise interest rates this year being reaffirmed once again, Gold is coming under pressure. The metal has now declined to its lowest valuation since the day of the shock from the Swiss National Bank (SNB) at $1245 and continued indications that the US economy is still on the right tracks will likely lead to further pressure for the commodity. The EURUSD has also encountered bearish momentum with the pair dropping by close to 100 pips at 1.1351. The ongoing situation around the Greece bailout will continue to lead to headlines moving forward, while providing a downside risk for the pair.

The opening statements from the press conference between the Greek Finance Minister and German Finance Minister that the “Roots of Greece’s difficulties lie in Greece” and even the two disagreeing on whether they “agreed to disagree” just says everything you need to know regarding how successful the meeting between the two went, with negotiations over the Greece bailout deal likely to go down to the final wire.

Aside from the NFP reaction, another major talking point on the currency markets is the EURDKK peg following the Danish Central Bank cutting its interest rates for the fourth time in three weeks yesterday. Despite comments from the Denmark Central Bank Governor Lars Rohde that he will do “whatever it takes” to defend the peg and that the minimum exchange rate “can go on forever” questions are still being asked whether the EURDKK peg can really be maintained. What many are forgetting is that it is within the central bank’s best interest to defend the minimum exchange rate to be honest because two of Denmark’s two neighbours (Norway and Sweden) are seeing their currencies come under continuous pressure and this provides a reason on its own for the central bank to keep the Danish Krone valuation low anyway.

Moving on to the GBPUSD, the Cable has traded with more volatility and upside momentum than expected this week. One major contributor behind the GBPUSD advance was USD softness, while the pair has also benefited from a hat trick of PMIs this week (Construction, Manufacturing and Services) coming in higher than expected and indicating that the UK economy has commenced the year with robust momentum.

The increase in volatility for this pair is expected to continue this week with the GBP likely to face a major downside risk when the Bank of England (BoE) inflation report is released. It is no hidden secret to anyone that the BoE contain extremely strong views on inflation with the UK economy encountering unexpected deflation risks following the collapse in the price of oil. This has even inspired the two dissenting members of the MPC to recently switch their votes against a UK interest rate rise. With the latest inflation data showing UK inflation levels had fallen to a historic-low at 0.5% and the price of oil having continued to make new low in the month of January, the chances are high that the inflation reading this month is going to be even worse.

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