US dollar continues to rally as we wait on jobs

• Dollar index at its highest level in a decade

• EURUSD driven down to 1.10 by Draghi

• Bank of England maintains rates at 0.5% for 72nd month in a row

• I expect US jobs market to add 237,000 jobs in February

Good morning,

The US dollar has not been as strong as it is this morning for ten years following another day of gains yesterday, particularly against the beleaguered European single currency. EURUSD has not been able to break the 1.10 mark quite yet but looks poised to do so today as the euro remains weak and the market waits for the latest US jobs report.

While little was really said within the European Central Bank President’s post monetary policy decision press conference, markets were keen to press the euro lower. The ECB revised its inflation outlook lower for 2015 while expecting 1.5% growth this year from the European economy. The full effects of the ECB’s QE plan are within these numbers and represent the huge bet that the ECB has made on its stimulus plan driving inflation and growth onward.

Reiterating that the QE plan could continue beyond September 2016 and that alternative assets away from sovereign debt may be purchased also took the single currency lower.

And so the question sits as to where EURUSD could go? Markets like nice round numbers and 1.10 is exactly that. A break of that, however, opens up previous lows from 2003 of 1.0765. Should that number be taken out, then all everyone will be talking about is parity.

The reaction in GBPEUR is more difficult to call. GBPUSD has been dragged lower by this broad USD buying and has limited how well sterling can perform against the euro. Election risk is still not being seen too widely but, as I said last week, the rebalancing of GBP lower combined with the moves in the options markets seem to suggest that further sterling weakness is foreseen and expected.

Needless to say there was little to be excited about when it came to the Bank of England meeting. Keeping rates at 0.5% for the 72nd month in a row was as expected as the sun rising in the east, setting in the west and the sky remaining blue in the intervening period. As mentioned earlier in the week, there is the possibility that we have seen some of the more hawkish members break the recent unanimity on rates this month given the pick-up in wages and the belief that the current low levels of inflation will disappear soon.

Today’s payrolls report from the US jobs market and the optimism behind it is the main booster to the US dollar at the moment. While some US data has been rather hit-and-miss since the turn of the year, news from the labour market has been nothing short of spectacular. Last month’s was a case in point with 257,000 jobs added and wages rising by 0.5%. The participation rate - i.e. those with a job or actively looking for a job fell – also improved to show that more and more people were coming back to the jobs market. If we get a figure that shows increasing employment and higher wages for those working in the US, Monday’s update will also be about just how strong the USD can possibly be. I am looking for the US economy to add 237,000 jobs and for wages to rise by 0.3% on the month.

Have a great day and a better weekend.