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The US dollar edged up after the ISM reported US services sector activity in January. The index rose to 58.7, while economists predicted a decline. However, the main reason that spurred a wave of dollar buying was one of the sub-indices, namely the employment indicator. Over the course of a few months, the overall gauge remained comfortably above 50, which made it possible to count on a quick economic recovery.
The employment sub-index rose to 55.2 from 48.5 in December, which means that payrolls rebounded more than expected in January.
The ADP National Employment Report was also upbeat. Private payrolls increased by 174,000 jobs against the forecast of 49,000.
The positive ISM and ADP reports indicate that the data on nonfarm payrolls to be released on Friday will turn out to be positive as well. According to economists, nonfarm payrolls are likely to increase by 50,000 jobs in January after declining by 140,000 in December. However, some experts believe that the indicator will be much higher. Moreover, the yield on US five-year Treasury Inflation Protected Securities has the highest level since 2013. This fact also suggests that the indicator will most likely be greater.
Eight years ago, inflation expectations were based on the unprecedented QE3 stimulus program. Now expectations apparently depend on both the 1.9 trillion relief package and the absence of the Fed's aggressive moves. However, in the current environment, a potential spike in inflation is likely to cause more aggressive actions from the regulator.
Historical experience shows that the euro/dollar pair usually loses ground following the president's inauguration. The US economic outlook is rather optimistic compared to the outlook for other G10 economies. Besides, the United States is far ahead of the European Union in terms of mass vaccination against the coronavirus. This means that the United States is likely to lift quarantine restrictions sooner than Europe.
To sum up, the US dollar has greater potential for growth than most G10 currencies. If risk appetite grows, safe-haven assets will most likely suffer losses.
USD/CAD
The US dollar/Canadian dollar pair's upward movement has slowed down. The main reason is that the loonie, which traditionally follows the US stock market, has received strong support in recent days. In addition, according to the Commodity Futures Trading Commission data, speculators raised net long positions by 274 million to 1.085 billion last week.
Even though the price has turned down, it is still above the long-term average. This points to a possible resumed upward trend.
Of course, the Canadian dollar is being supported by other factors. GDP growth in November topped market expectations. The Raw Materials Price Index and the Industrial Product Price Index also exceeded the projected readings. This means that traders can count on boosted demand and consequently higher inflation. Nevertheless, the greenback has more grounds for growth rather than the loonie.
The USD/CAD pair is expected to resume its bullish run with a view to reaching the target levels of 1.2945 / 50 and then 1.3080.
USD/JPY
The US dollar is still trading under significant pressure. However, the yen is about to lose ground. During the reporting week, the value of net long position decreased by 590 million to 5.458 billion. The demand for risky assets contributed to a confident upward reversal in the price.
The Japanese manufacturing PMI fell sharply in January. Japan's services PMI came in at 46.1 in January, down from 47.7 in December, marking the sharpest decline since August. New orders dropped at the fastest pace since May. Its labor market remained stable.
All this contributes to a decline in the yen. Besides, the Bank of Japan and the Cabinet Office do not want to see a strong yen amid falling production. The price is likely to test the resistance zone of 105.20/40. The levels of 105.70 and 106.10 can be seen as the next targets. The trend is quite strong and is backed up by fundamental factors.
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