Pound at Lowest Since 1985 Ahead of Labour Data

Daily Analysis - 05/10/2016

ADP Payrolls in Focus Ahead of Friday’s US Jobs Report

ADP payroll data is due for release at 12:15 GMT on Wednesday and will be an important precursor to Friday's official jobs figures. ADP is expected to report the creation of 166,000 jobs last month, compared to the 177,000 recorded in August.

Jobs in Focus as Dollar Climbs

With more hawkish commentary from certain Federal Reserve members foretelling potential interest rate increases, the upcoming report due later in the session from payroll processor ADP could spur further rate hike speculation. The US dollar is currently hovering close to a two-month high against a basket of currencies, buoyed by higher Treasury yields and hawkish comments from Fed’s Loretta Mester. The dollar index last stood at 95.989, just below its August 9th high of 96.442. The greenback started the week on a strong footing following a better than expected survey of the US manufacturing sector. Should the upcoming ISM non-manufacturing data and Markit Services PMI also beat expectations, it could heighten upward dollar momentum higher. US equity markets closed marginally lower on Tuesday as a result of a stronger dollar amid growing expectations that monetary tightening would lead to a massive reallocation of investment capital globally.

Gold Records Biggest Loss in Three Years

Gold prices recorded their biggest tumble in almost three years as a stronger dollar signalled the Federal Reserve might be closer to a rate increase than previously anticipated. The decline accelerated after Cleveland Fed President Loretta Mester reiterated her call for a December rate hike. The prospect of higher rates is typically negative for gold, as investors are likely to snub the safe haven metal for assets that offer better yields. Spot gold tumbled -3.30% on Tuesday to a low of $1,266.33 per troy ounce, marking its biggest single day drop since September of 2013. Sellers entered in droves after gold broke through the key psychological support at $1300.00, which had been acting as a floor since the Brexit referendum three months ago. Meanwhile, silver experienced even steeper losses, ending the session down over -5.00%.

Euro Extends Gains as Pound Falls to Lowest Since 1985

The Euro is extending its bounce from Tuesday’s session after a report suggested the ECB was considering tapering its asset purchase program. According to Bloomberg News, the ECB is thinking of gradually winding down its EUR 80 billion of monthly bond purchases, suggesting that the Central Bank is rapidly running out of available assets to purchases. The result was wild swings in the Euro as investors reacted to the possibility of less accommodation with EURUSD rising 0.20% to 1.1222 after rallying as high as 1.1239 on Tuesday. On the other hand the UK Pound fell to a fresh, three decade low on concerns that the UK’s exit from Europe could rock the domestic economy. Analysts fear that latest comments from the British government points to a "hard Brexit," which could lead to an exodus of a large number of banks from London, sending GBPUSD tumbling.

Asian Equities Trade Mixed

Asian stock markets were trading mixed on Wednesday, with Australia’s ASX 200 dropping 0.50%, mainly hurt by losses in the energy sector while the Japanese benchmark Nikkei 225 rose 0.60%, helped in large part by a weaker Yen. Australia's retail sales for August increased 0.40% on a month over month basis, outperforming a forecast gain of 0.20%. The rise in retail sales was further proof of the improving consumer confidence as rates remain low. While markets in mainland China are currently shuttered for Golden Week, concerns about the pace of property price gains are raising the possibility of the housing market overheating. According to Goldman Sachs, any downturn in housing could spark a selloff in metals prices as the perceived vulnerability of the housing market grows, potentially impacting copper’s most recent rally.