In Becalmed FX Market, Sterling Shines

Most of the major currencies are little changed from levels seen late yesterday. Sterling is the main exception. It rallied a cent to new 7-month highs against the dollar and 8-month highs against the euro in response to better than expected jobs data. The data further undermines the credibility of the BOE's forward guidance and reinforces speculation that it may raise rates by the end of next year.

The unemployment queues (claimant count)fell 32.6k in August, about a third more than the consensus expected and the July fall was revised to 36.3k from 29.2k. The ILO unemployment rate slipped to 7.7% from 7.8%. The weakness of the report lays with the earnings data. Average weekly earnings on a 3-month year-over-year view (reported with a month lag was halved to 1.1% from the revised June figures. More people are working in the UK, but earnings growth is lagging inflation by a widening margin.

On one hand, the weak earnings growth may be seen from some at the BOE as an indication that price pressures may ease, which it should find as comforting. On the other hand, the recent strength of sterling and the backing up of money market rates shows a market pricing in tightening well before Carney's forward guidance suggests. Indeed, while the speculation that the Fed may slow its monetary stimulus, the price action suggests the market is expecting the BOE to actually hike rates before the US (and of course, well before the ECB).

Initial support for sterling is now seen in the $1.5730-50 band. While the $1.60 area may beckon from a technical perspective, many may turn cautious later in the week and into early next week as the FOMC outcome is awaited. For its part the euro was sold just below GBP0.8385, but quickly bounced back above GBP0.8400. A move back toward GBP0.8430-50 may provide a better selling opportunity.

The Reserve Bank of New Zealand is wrestling with a similar problem. It's rate decision will be made late in the North American afternoon. While policy is widely anticipated to be on hold, the central bank cannot be happy with currency level or the tightening anticipated by the market. The risk is that it pushes back. The OIS implies around 75 bp in tightening over the next year. This seems more than a little aggressive, from the RBNZ's perspective. While the finance minister had told Parliament that the $0.7800-$0.7900 area for the New Zealand dollar was not bad, it is now closer to $0.8100. The central bank, moreover, likely did not agree with the implication of the finance minister's assessment.

Early Thursday in Sydney, Australia releases its August employment report. A recovery from the 10k decline reported in July is expected. In the foreign exchange market, the Australian dollar is consolidating yesterday's cent advance. The pullback has been limited to the $0.9280 area as it tries to solidify the foothold above $0.9300.

The move toward a diplomatic solution to the Syrian crisis may have weighed on the yen yesterday, but today it is in a consolidative mode. The greenback did edge to new mutli-week highs against the yen near JPY100.60, it quickly was pushed back, amid talk of Japan-based offers, but found support near JPY100. Technically, it appears the North American market will test the upside again.

The euro is also consolidating. The 20-day moving average, which has capped the euro so far this week comes in just below $1.3290. A break of this would signal a test on the $1.3330 area, which would likely be sold into as short-term participants try to position for next week's FOMC tapering.

The economic calendar is light for the US, but will pick up Thursday and Friday, with the last weekly initial jobless claims report before the FOMC meeting, PPI and retail sales.