After extremely volatile trading later in the New York session on Thursday, USD/JPY found support below the 98.00 level following a rapid plunge from highs around 99.40. This dollar vulnerability allowed the Euro to rally back above 1.34 following the 200-pip plunge following the ECB rate cut.
The Euro dipped sharply early in European trading on Friday as Standard & Poor’s again downgraded the French credit rating. There was a retreat back to below 1.34 before steadying into the key data releases with a reluctance to commit to fresh positions.
There was an inevitable mood of caution ahead of Friday’s US payroll release. The monthly data always triggers substantial market moves and the uncertainty this time around was compounded by the potential impact of the US government shutdown.
In the event, the headline data was substantially stronger than expected with a non-farm payroll increase of 204,000 for October from an upwardly-revised 163,000 gain the previous month. As expected, the unemployment rate increased to 7.3% from 7.2%.
The Fed will still have important reservation surrounding the labour market, but the data will revive expectations that the FOMC will move closer to a tapering of bond purchases, especially given the recent robust tone in PMI surveys. The data will reinforce expectations of US out-performance which will boost sentiment.
The dollar rallied firmly immediately after the release with EUR/USD dropping to near 1.3350 and USD/JPY approaching the 99 area once again. After a period of consolidation, markets again looked to challenge key dollar resistance levels. In this environment, 1.3350 in EUR/USD came under fresh attack.
Subsequent US data releases did not provide any additional support as the University of Michigan confidence index weakened again. The Euro was, however, undermined by dovish comments from ECB member Asmussen. He stated that, although there were some differences in timing over the rate cut, there was no question about the need for action. Given that he is a representative of the hawkish German camp, the comments were very significant and EUR/USD retreated sharply to lows below 1.3320 as USD/JPY again attempted to hold above 99.0.
Sterling had been hampered earlier by a wider than expected UK trade deficit with goods deficit of GBP9.8bn for September, the widest shortfall of 2013. GBP/USD was unable to make any further impression on the 1.6120 resistance area and retreated sharply with a break below 1.6000 support in US trading as the US currency continued to secure wider support.