US services PMI slide erases payrolls gain, the Dollar tumbles

Week Ahead – Sensitive CPI to Shape Fed Action on Policy

Summary

Following another roller coaster session, the Dollar Index (DXY), which measures the value of the Greenback against 6 majors, tumbled 1.14% to 103.57 (105.00) at the close of trade.

US treasury bond yields plummeted. The benchmark 10-year treasury rate settled at 3.56%, down 16 basis points (3.72%). The US 2-year bond yield was last at 4.25% from 4.45%.

The US Payrolls report saw a total of 223,000 jobs created in December, which beat forecasts of 200,000. However, November’s payrolls rise was adjusted downwards to 256,000 from an initial 263,000. The Jobless Rate fell to 3.5% (3.7%). The Greenback initially rallied following the release.

However, a disappointing US ISM Services report weighed on the Greenback. The Institute for Supply Management’s non-manufacturing PMI dropped to 49.6 in December, from November’s 56.5. It was the first time that the ISM fell below the 50 threshold since May 2020.

New Zealand’s Kiwi (NZD/USD) outperformed, soaring 1.86% to 0.6353 against Friday’s open at 0.6234. The Australian Dollar (AUD/USD) wasn’t far behind, climbing to 0.6875 (0.6763).

Against the yield sensitive Japanese Yen, the US Dollar slid 1.03% to 132.08 from 133.22 Friday morning. The British Pound (GBP/USD) gained 1.4% against the Greenback to 1.2085 (1.1928).

The US Dollar plunged against its Asian and Emerging Market Rivals. Against the Thai Baht, the Dollar dropped to 33.82 from 34.02. USD/SGD (US Dollar-Singapore Dollar) eased to 1.3400 (1.3450).

Global stock markets rallied on the weaker than forecast US ISM report. Analysts predicted that Fed officials would hike interest rates 25 bps versus a 50 bps prior to the report. The DOW rocketed 2.11% higher to 33,632 (33,002). The S&P 500 settled at 3,895, up from Friday’s open at 3,820.

Other economic data released on Friday saw Germany’s Factory Orders slump to -5.3% from a downward revised 0.6% (from 0.8%). German Retail Sales rose to 1.1% from -2.8%, was but lower than economist’s expectations at -0.5%.

The Eurozone Headline CPI Flash Estimate (y/y) fell to 9.2% from a previous 10.1%, and lower than forecasts at 9.6%. Eurozone Core CPI climbed to 5.2% from 5.0%.

Canada’s economy added 104,000 jobs in December, up from November’s 10,100. Canada’s Unemployment Rate eased to 5.0% from 5.1%, and better than forecasts at 5.2%.

• EUR/USD – The Euro benefitted from the Dollar’s demise, soaring 1.1% at the New York close to 1.0645 from 1.0535 Friday. In choppy trade, the overnight low traded was at 1.0479. While Germany’s 10-year Bund yield slid 11 basis points to 2.2%, it was less than the drop of its US counterpart, which lost 16 basis points.

• GBP/USD – Sterling soared against the broadly based weaker Greenback to 1.2085, up 1.43% from Friday’s open at 1.1928. Overnight high recorded for the British Pound was at 1.2099. In volatile trade of its own, the overnight low recorded was at 1.1837 for Sterling.

• USD/JPY – The Greenback tumbled against the Japanese Yen weighed by lower US bond yields, settling at 132.08 against Friday’s 133.22. The benchmark US 10-year yield tumbled to 3.56% (3.72%). In contrast, Japan’s 10-year JGB yield climbed 8 basis points to 0.49%.

• AUD/USD – The Australian Dollar (AUD/USD) jumped to 0.6875 at the close of trade, up 1.65% from its Friday open at 0.6763. Overnight, the Aussie Battler rocketed to a high at 0.6887 before easing at the close. Overnight low traded was at 0.6815 in choppy trade.

(Source: Finlogix.com)

On the lookout

The disappointing US Services PMI weighed heavily on the Greenback which opens on a soft note heading into this week. Lower US yields will continue to prevent any meaningful Dollar rallies heading into today’s economic calendar releases.

Japanese markets are closed to observe their Coming-of-Age Day.

Australia kicks off with its November Preliminary Building Permits (m/m f/c -1.0% from a previous -6% - ACY Finlogix).

Switzerland opens Europe’s data releases with its December Unemployment Rate (f/c 2.10% from 2% - ACY Finlogix).

Germany follows with its November Industrial Production report (m/m f/c 0.1% from -0.1% - ACY Finlogix).

France releases its November Trade Balance next (f/c -EUR 10.5 billion from -EUR 12.15 billion – ACY Finlogix).

Italy follows next with its November Unemployment Rate (f/c 7.8% from 7.8% - ACY Finlogix).

Canada starts off North America with its November Building Permits (m/m f/c 0.6% from -1.4% - ACY Finlogix).

The US rounds up today’s data releases with its December Consumer Inflation Expectations (f/c 5.2% from 5.2% - ACY Finlogix).

On Thursday (12 January) the US releases its December Headline and Core CPI report, which is crucial to the market and the Federal Reserve.

Trading perspective

After an initial rally following a US Payrolls gain, the Greenback tumbled under the weight of a weak US ISM Services report.

Which saw the non-manufacturing PMI plunge to 49.6 in December, way below November’s 56.5.

It was also the first time the ISM fell under the 50 threshold since May 2020. Which resulted in a slump in US bond yields.

The benchmark 10-year yield fell 16 basis points to 3.56%. The shorter two-year rate plunged 20 basis points to 4.25%.

Economists now expect Fed officials to hike interest rate 25 basis points from 50 bps prior to the report.

The Dollar reversed its gains following the stronger than expected Payrolls rise to 223,000 (against 200,000) and fall in Unemployment to 3.5% (3.7%).

Wall Street stocks gained over 2% on Friday. Expect Asian equity markets to rally with a risk-on stance. This should keep the US currency pressurised while risk FX will be underpinned.

• AUD/USD – The Aussie Dollar thrived against the broadly based weaker Greenback amidst a risk-on stance. Expect more of the same as Asia kicks off today. The Australian Dollar finished at 0.6875 in New York, up from Friday’s open at 0.6763, but off its recorded high at 0.6887. Expect the Aussie Battler to remain supported today with immediate resistance at 0.6890 and 0.6920 to cap any sustained rallies. Immediate support is found at 0.6840, 0.6800 and 0.6770. Look for more choppy trade in a likely range today of 0.6770-0.6920.

• EUR/USD – The Euro benefitted from the overall weaker US Dollar, climbing to 1.0645 in late New York from 1.0535 Friday. Overnight high traded for the EUR/USD pair was at 1.0652. Immediate resistance today is found at 1.0655 followed by 1.0685. On the downside, look for immediate support at 1.0610 and 1.0580. Look for further choppy trade in this currency pair, likely between 1.0530-1.0680. Trade the range.

• USD/JPY – Against the Yen, the Greenback tumbled 1.03% to 132.08 (133.22 Friday). In volatile trade of its own, the USD/JPY soared to an overnight high at 134.77 before tumbling at the close. Overnight low traded was at 131.95. Look for further volatility in this currency pair, likely range today: 131.85-133.85. Trade the range, nice and wide.

• GBP/USD – Sterling soared against the overall weaker Greenback to 1.2085 from Friday’s opening at 1.1928. Overnight, the British Pound traded to a high at 1.2099 before easing at the close. Overnight low traded was at 1.1837 in a volatile session. Looking for the GBP/USD pair to trade a likely range today of 1.1870-1.2120. Trade the range, there’s lots in it.

Have a good trading week ahead all. Happy Monday.