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Cautious optimism circulates ahead of US jobs report

With the exception of the FTSE 100, stock markets in Europe posted solid gains yesterday. 

The fears that circulated in relation to the Reddit-retail investors’ saga have well and truly faded. Continued optimism that the new Biden administration is moving toward passing a stimulus package helped the mood. Progress on vaccination roll outs helped sentiment too.

Yesterday, the Bank of England (BoE) met economists’ expectations by keeping interests on hold and maintaining the asset purchasing programme. The topic of negative interest rates featured heavily but it would appear the BoE would only resort to the policy should the economic situation decline. Growth in the final quarter of 2020 along with the first quarter of this year is likely to suffer as a result of the lockdown, but in the rest of 2021 the economy is expected to see a rapid recovery. BoE chief, Andrew Bailey, said that banks should make preparations for negative interest rates so they could cope with the policy, should it be introduced. If the BoE hasn’t brought in negative rates by now, they are unlikely to do so later this year – when there should be far fewer restrictions in place. The CMC GBP Index hit its highest level in 11 months as traders took the view that negative rates will not be imposed. Sterling’s strength is partly the reason why the FTSE 100 underperformed.         

The US non-farm payrolls report at 1.30pm (UK time) will be closely watched. The headline reading is expected to show that 50,000 jobs were added last month, which would be a big improvement from the 140,000 jobs lost in December. Unemployment is anticipated to remain at 6.7%, yearly average earnings are tipped to hold steady at 5.1%. The participation rate measures the workforce, which includes the employed and the unemployed who are actively seeking work. Economists are expecting the rate to fall to 61.3% from 61.5%. Should that be the case, it could be a sign that some people who are out of work have given up on trying to find work, possibly because the conditions are so bleak.          

It has been a positive few days for US labour data. The ADP employment report for January was 174,000 and that hammered the 49,000 forecast. On top of that, the December report was revised from -123,000 to -78,000, so it was a double win. Good news also came from the initial jobless update, the level dropped from 812,000 to 779,000 – a two month low. Services account for roughly 70% of US economic output, so the tick up in the ISM non-manufacturing report for January to 58.7, from 57.7, bodes well for the country. Interestingly, the employment component was 55.2, up from 48.7 – the big turnaround suggests that employers have gotten over their previous concerns about taking on new staff Earlier in the week, the ISM manufacturing update came in at 58.7, down from 60.5 in December. The employment metric edged up from 51.7 to 52.6, so it seems that hiring is still in force even if the overall activity has come off the boil a little.          

President Biden is pushing for a $1.9 trillion stimulus package to help invigorate the US economy. A group of Republican senators has expressed support for a $618 billion relief package. Should we see a robust jobs report, it might remove some of the urgency to approve a spending scheme. On the other hand, a weak update is likely to intensify calls for a robust fiscal response. In recent years, equity markets have often rallied in the wake of negative news, as a weaker economy calls for more stimulus.

Italy’s FTSEMIB continued to rally on Wednesday’s news that Mario Draghi, the former head of the European Central Bank (ECB), has been tasked with trying to bring about a new government. The former central banker is due to meet the various political parties over the weekend, which is likely to challenging to say the least, given the Lega Party said they will not support a Draghi government if it has the support of the Five Star Movement.

The S&P 500 hit a new record high last night as the bulls are back in control. In Asia, equity markets have recouped some of yesterday’s losses thanks to the overall positive mood circulating, European markets are expected to have a positive open.

The CMC USD Index hit its highest level since 21 December on hopes the US economy will continue to be relatively strong, especially seeing as an additional stimulus scheme is in the pipeline. EUR/USD is trading below 1.2000, a two month low. Gold also fell to a two month low due to the rally in the greenback. Silver, copper and platinum suffered as a result of the dollar’s positive move too.   

Economists are expecting the UK Halifax HPI report for January to show growth of 0.3%, which would be an improvement on the 0.2% rise registered in December. It will be announced at 8.30am (UK time).

At 1.30pm (UK time) Canada will post its jobs data too, unemployment is anticipated to be 8.9%, up from 8.6%. The employment change metric is expected to show that 47,500 jobs were lost last month, 62,600 jobs were lost in December.  

EUR/USD – while it holds below the 50 day moving average at 1.2140, the outlook should remain bearish. 1.1800 could act as support. If the broader uptrend continues it could retest 1.2349

GBP/USD – since late September it has been in an uptrend, last week it hit a 33 month high. If the positive move continues, it could target 1.4000. A pullback might find support at 1.3542, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December and further losses might target 0.8670. A rally from here could see it hit 0.8995, the 200-day moving average.   

USD/JPY – since early January it has been moving higher and yesterday it hit a 12 week high. While it holds above the 50-day moving average at 103.91, the bullish trend should continue and it might bring 106.00 into play. A move back through 103.91, could see it target 102.59.