December Rate Hike still on the table despite weak jobs report
The main story this week in the markets was the flash crash of British pound on Friday. The currency lost 6 percent in under two minutes at the start of the Asian trading session. There are multiple theories on what sparked the move with algorithmic trading and human error among others. The GBP touched 31 year lows and although it recovered some ground it will close the week under the 1.25 price level.
Commodities were lower with the rally in energy prices losing some steam on Friday despite a positive week ( Brent +3.96 percent in last 5 days) as the Organization of the Petroleum Exporting Countries (OPEC) is preparing to meet with non-OPEC members Russia, Brazil, Kazakhstan, Azerbaijan, Mexico and Oman next week in Istanbul. Comments from the Russian minister of Energy depreciated crude prices on Friday as he made clear the meeting would be just for “consultations” so an official agreement is unlikely. Gold on the other hand lost 4.75 percent even as it briefly advanced against the USD following the disappointing non farm payrolls (NFP) report, but not enough to expect lower interest rates to remain for longer.
The USD was mixed against majors on Friday after a softer than expected jobs report, but recorded a positive week with the biggest gains coming at the expense of the GBP (4.2 percent). The U.S. economy added 156,000 positions and saw an increase of the unemployment rate to 5 percent. The modest growth in jobs will not derail a December rate hike but has chipped away at the USD momentum ahead of U.S. retail sales and inflation data on Friday, October 14 at 8:30 EDT.The EUR/USD lost 0.418 percent in the last week. The single pair was trading at 1.1189 on Friday after a lower than expected NFP report put the EUR above the 1.12 level. U.S. Federal Reserve rhetoric has built a strong USD narrative that was able to withstand the higher unemployment rate. The miss in job creation in the September report is not enough to put in doubt the token interest rate hike in December.The GBP/USD lost 4.167 in the week in a move that was exacerbated by the flash crash on Friday. The pair is trading at 1.2434 after regaining some lost ground after the sudden downward move this morning. The GBP was on a downward trajectory since the British government issued details on the timeline to trigger Article 50, after which a Brexit would be officially triggered. The outlook for the U.K. economy had improved after the impact of Brexit appeared to have been exaggerated, with even the International Monetary Fund (IMF) forecasting a soft landing in 2016. The nature of the landing was given more details with a stern warning to the U.K. on Friday morning by French Prime Minister Francois Hollande that the price of leaving the European Union will be a hard Brexit. The published remarks did not trigger the drop as Hollande words were posted as the flash crash unfolded but they did the pound no favours. Human error and a backfire in algorithmic trading strategies are being blamed for the flash crash that took traders by surprise as they were awaiting the influential U.S. jobs report.
The much-awaited first interest rate hike by the Fed in 2016 is still on even after the jobs miss. The obvious dissent in the Federal Open Market Committee (FOMC) will probably end up in a token rate hike in December even as the economy shows little sign of overheating. The next hurdles for the USD will come with the release of the inflation data and retail sales due on Friday, October 14. The U.S. consumer remains confident but has not contributed as much and the price of goods is putting no pressure on the Fed, with the central bank on the record of willing to let the economy run a little hot before tightening further. The minutes from the September meeting will be posted on Wednesday, October 12 at 2:00 pm EDT with traders looking for further insight into how deep does the dissent run internally and other details on the future path of interest rates.
Market events to watch this week:
Tuesday, October 11
5:00am EUR German ZEW Economic Sentiment
Wednesday, October 12
2:00pm USD FOMC Meeting Minutes
Tentative CNY Trade Balance
Thursday, October 13
8:30am USD Unemployment Claims
11:00am USD Crude Oil Inventories
Friday, October 14
8:30am USD Core Retail Sales m/m
8:30am USD PPI m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
About Alfonso Esparza
Senior Currency Strategist, OANDA, Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto. Follow on Twitterand on his Google+ profile.