Currency Briefing: Fed taper still in sight

ADP private-sector employment growth decelerated last month as employers added the fewest jobs since last May, but labor conditions may still be solid enough for the Federal Reserve to start tapering its substantial bond-buying program soon, according to observers.

The conclusion came after the release of the ADP indicator that showed private-sector jobs rose by 176,000 in August, down from 198,000 created in July. Even if the data on a monthly basis was fairly disappointing, the three-month moving average, which levels out some volatility, has steadily expanded over the last few months.

“We had hoped for a slightly stronger reading but this is good enough, if replicated in the official employment numbers tomorrow, to keep the Fed on course to announce tapering later this month,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a research note.

Additionally on Thursday, the U.S. Department of Labor published that the number of Americans who have filed for new unemployment-insurance benefits is near to a five-and-a-half year low.

All this was positive and convincing enough to persuade investors that another good release is to follow on Friday and push the EUR/USD lower to 1.3112 during the NY session on Thursday.

Economic data are scrutinized as investors try to evaluate when the Fed could start tapering its monetary stimulus program.

Though there has been some worries that mounting mortgage rates (because of taper expectations, bonds selling pressures and rising yields) are somewhat damaging the housing market` s recovery, a tapering announcement could come as early as this month if the Fed deems the economy healthy enough.

With regards to the closely awaited government data on non-farm payrolls and the unemployment rate today, let`s remember that U.S. employers slowed their pace of hiring in July but the jobless rate fell anyway.

That was a mixed signal that many analysts thought would make the Fed more cautious about drawing down its monetary and economic stimulus program.

The number of jobs outside the farming sector increased in July by only 162,000, far below the median forecast. At the same time, the jobless rate fell to 7.4 per cent, the lowest level since the end of 2008. The release tomorrow is forecast to show employers added more workers in August, according to a Bloomberg survey of economists.

Nervous about what the Fed may deliver on the next FOMC meeting on Sep 17-18, benchmark 10-year yields yesterday climbed three basis points to 2.93 per cent at 9:44 a.m. NY time, the highest since July 2011, an indication markets are calculating a September tapering.

In Europe, Germany is to produce official data on the trade balance and industrial production data (11:00 BST). Trade balance is expected to widen to €16.1 billion in July, whereas the industrial production is forecast to decrease on both a month-over-month and year-over-year basis.

Data will be mixed in itself and probably not sufficient enough to give any direction of the EUR/USD, now fully under selling pressure after the ECB meeting on Thursday and the job reports in the U.S.

Geopolitical additional pressure would derive from the G-20 meeting that started yesterday in St. Petersburg, Russia, where the U.S. President would look for diplomatic backing for a U.S. military strike on Syria.