US Dollar, Japanese Yen Under Pressure Post G-20, Ahead of Friday’s US Non-Farm Payrolls (NFPs)

Risk appetite has held strong throughout the day, leaving the "safe haven" US dollar and Japanese yen under pressure, as equities around the world closed sharply higher, with Hong Kong’s Hang Seng gaining 7.41 percent, Germany's DAX index rising 6.07 percent, and the US’s DJIA up 2.79 percent. While there was big event risk on hand for the day - the Group of 20 (G-20) meeting - there were few surprises to stoke volatility. Over the course of the morning, bits and pieces of the G-20 communiqué gradually leaked out, including news that the group would seek to expand financial regulation to “all systemically important financial institutions, instrument, and markets,” including hedge funds. The G-20 also said that they had committed to provide $6 billion in financing for poorer countries with funding from agreed sales of IMF gold and surplus income. However, the communiqué did not lay out specifics for further fiscal stimulus efforts, which will ultimately leave those decisions in the hands of the respective governments. Ultimately, with the G-20 members claiming that the summit was a success and with no talk of replacing the US dollar as the world’s reserve currency, investors were more than happy to go along with the buying of risky assets.

Meanwhile, one piece of US economic data was the Commerce Department said that new orders jumped 1.8 percent in February, marking the first increase in seven months and adding to a handful of indicators that have shown surprise improvements over the past week. On the flip side, we also saw dismal labor market news, as both initial and continuing jobless claims hit the highest levels since recordkeeping began in 1967. According to the Labor Department, initial claims rose by 12,000 during the week ending March 28 to 669,000 while continuing claims surged by 161,000 during the week ending March 21 to 5,728,000.

Based on this information as well as a Bloomberg News poll of economists, Friday’s release of US non-farm payrolls (NFPs) is likely to show job losses for the fifteenth straight month in March. At the time of writing, Bloomberg News was calling for NFPs to plunge by 660,000, but the odds seem more in favor of a decline of 700,000 or more. Meanwhile, something that is starting to garner even more attention is the unemployment rate, which is projected to hit 8.5 percent, the highest since November 1983. The steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has climbed from 4.9 percent up to 8.1 percent in February 2009 while personal consumption has slowed from 1 percent in Q4 2007 down to -4.3 percent in Q4 2008, and Q1 2009 results may be even worse. For a look at how this news could impact the US dollar, check out our NFP Outlook.

Euro Gains Despite European Central Bank (ECB) Rate Cut - Why?

The euro ended Thursday on a mixed note, as the currency surged against the Japanese yen, US dollar, and Swiss franc but slipped against the ultra strong commodity dollars. The moves came after the European Central Bank (ECB) cut rates by 25 basis points to 1.25 percent, which served as a positive surprise since a Bloomberg News poll had listed a forecast for a 50 basis point reduction. However, given the content of ECB President Jean-Claude Trichet’s post-meeting press conference, there is some bearish potential for the euro he not only left the door open to further rate cuts, but also hinted that quantitative easing may be discussed during their next meeting.

British Pound Gains with Other ‘Risky’ Currencies, UK House Prices Rise for First Time Since October 2007

The British pound continued to make headway higher on Thursday, along with other risky assets, thanks to broad improvements in investor sentiment along with surprisingly strong UK economic data. Indeed, Nationwide home prices unexpectedly rose 0.9 percent during March, marking to first increase since October 2007, which helped to push the annual rate of growth up to -15.7 percent from -17.6 percent. This is one of the only positive releases we’ve seen from the UK in quite some time, but of course, it will take much more than just one economic report to signal recovery. As it stands, the outlook for the UK remains very bleak due to the extent of the slowdown in both domestic demand and foreign demand. From a technical perspective, though, upside potential remains for GBP/USD as the pair has broken above the 100 SMA at 1.4565, but we still need to see a push above the March 24 high of 1.4781.

Terri Belkas is a Currency Strategist at FXCM.