Optimism Rules on Friday After A Challenging Week

The markets kicked off with a healthy dose of optimism over US – Sino trade talks and the end of the US government shutdown. Improved sentiment saw global indices charge higher, rebounding from yesterday’s selloff.

European markets followed in the footsteps of Asia, surging higher. The FTSE trailed the likes of the DAX thanks in part to the stronger pound in the morning session. However, non-farm payrolls smashing expectations has seen the dollar soar later in the session, benefitting the multinationals on the FTSE which make up over 70% of the index.

GBP/USD pares gains as NFP smashes expectations
It has been a day of two halves for cable. The pound surged in early trade following better than expected service sector data. Whilst service sector activity was expected to increase to 50.7 in December, up from 50.4, it actually printed considerably higher at 51.2. Whilst pound traders we were relieved by the beat, the fact is that the largest sector of the UK economy has lost pretty much all the momentum that it had last summer, as Brexit uncertainty has seen new orders decline, hitting job creation and activity ion the service sector. The figure doesn’t bode well for the tough winter months ahead.

The rally in the pound was short lived thanks to a surge in the dollar following more than impressive US jobs data. 312,000 jobs were created in December in the US, well ahead of the 177k expected and significantly more than November’s 155k. Wages grew faster than forecast jumping 0.4% month on month, and 3.2% year on year. 
Traders had been growing concerned over the Fed’s ability to hike rates this year given following a run of weak data and growing concerns over the health of the global economy. However, with solid job creation and given the inflationary impact of stronger wage growth, inflation could remain at or above 2% given the Fed reason to continue hiking. As a result, the dollar rallied. 

Traders will now focus on Federal Chair Powell as he is set to appear with ex chairs Yellen and Bernanke on a panel. Traders will be looking for any hints as to what the Fed intends to do with monetary policy this year. We are not expecting Powell to point towards any big changes. We expect him to stick with highlighting the uncertainties of what lies ahead. Traders will be wanting to hear the Fed is prepared to be flexible. This should be sufficient to keep traders calm but could limit the gains on the dollar.