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US dollar: A look ahead

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US dollar: A look ahead

The US dollar ended the prior week on a rally after job creation exceeded expectations in October, according to official government data. US employers added 204,000 payrolls amid the government shutdown, as businesses continued to ramp-up during hiring season. The greenback was also supported by a government report showing gross domestic product expanded 2.8 percent in the third quarter, compared to expectations for 2 percent.

Market participants are speculating whether the latest batches of economic data are enough to push the Federal Reserve to taper bond buying sooner than expected. Economists forecast the first round of cuts will commence in March 2014 at the earliest. The week ahead will test market sentiment toward an asset taper, as investors weigh the downside risks of prolonged federal stimulus.

The US dollar gained more than half a percent against a basket of its peers the prior week, sending the dollar index to 81.21. The greenback was idle on Veterans’ Day, consolidating at 81.07 ahead of a moderate data wire. On Thursday the Senate Banking Committee will hold a hearing on the nomination of Janet Yellen to the Chair of the Federal Reserve. Yellen will likely face criticism from Republicans for her dovish approach to monetary policy, but this won’t affect her nomination, as Democrats control more than half of the Senate.

Other than the Yellen hearing, the currency markets will monitor developments in other regions, which will dominate headlines this week. Below is a breakdown of what to expect from the major peers.
EUR/USD: The euro fell more than 1 percent against the greenback the prior week, as currency traders reacted to an unexpected rate cut from the European Central Bank. Attention will shift back to the data this week, led by quarterly and annualized gross domestic product from Germany and the euro area. The German economy expanded at an annualized rate of 1.1 percent in the third quarter, according to forecasts.

The euro area economy contracted at an annualized rate of 0.3 percent in the third quarter, according to estimates, despite quarter-on-quarter growth. Sentiment toward the EURUSD will continue to decline if initial GDP estimates fall below forecasts. The unexpected rate cut will also weigh on euro pairs, as market participants speculate whether the ECB will pursue more drastic measures to stimulate the economy.

GBP/USD: Elsewhere in Europe, the British pound will make headlines in the mid-week after the Bank of England publishes the closely watched inflation report, accompanied by a press conference from BOE Governor Mark Carney. Carney will present revised growth forecasts after the UK economy expanded at the fastest rate in more than three years last quarter. While the BOE isn’t expected to shift policy, more robust growth projections will support the British pound.

UK employment data will also make headlines this week. The UK’s unemployment rate has improved over the past year after peaking at 8.4 percent in October 2011.

USD/JPY: The US dollar rallied half a percent against the yen the prior week, as market participants asked whether the pair was ready to break higher over the short-term. The USDJPY closed at a 7-week high last Thursday after the US GDP report. Japan will also release data on quarterly GDP growth this week. Japan’s economy expanded 1.7 percent over year-ago levels, according to projections. The following week will test whether the USDJPY will remain range bound. According to a recent UBS forecast, the pair will remain within the 95-100 range over the next three months.

Economic data poses little risk to the US dollar this week, but the greenback could still face considerable volatility emanating from the Senate hearings. The greenback will showdown against the yen and British pound, whose movements could illicit further volatility for the US dollar.

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