DAILY FOREX REPORT FROM RESEARCH VIA 7/JULY/2014

MARKET HEADLINES

• Dollar up on jobs cheer, Fed's response keenly awaited The dollar held firm at one-week highs on Friday, having pulled sharply ahead of its peers after surprisingly strong US jobs growth added to hopes the economy is pulling out of a first quarter slump. The dollar index climbed as far as 80.315 after US employers blew away most forecasts by adding 288,000 jobs last month. It was last at 80.205, well off an eight-week trough of 79.740 plumbed earlier in the week. Against the yen, the greenback hovered near a two-week high at 102.13. It was up 0.7 per cent so far this week, on track for its best performance in 2-1/2 months. "The data supports expectations for the Fed to begin coaxing the Fed funds rate higher by the middle of next year," analysts at BNP Paribas wrote in a note to clients. "Markets are now on alert for any change of message from the Fed in response to the better data." The market will have an opportunity to gauge any change of message, particularly from Fed Chair Janet Yellen, at the Fed's July 29-30 policy meeting and the annual global central banking summit at Jackson Hole, Wyoming, in August. "The dollar's gains look limited considering how strong the jobs data was, as participants are still unsure how US inflation pans out," said Junichi Ishikawa, market analyst at IG Securities in Tokyo. "The possibility of Fed's Yellen shifting to a more hawkish stance has added to the uncertainty. Upcoming data such as retail sales, consumer prices and personal consumption expenditure (PCE) may help clear the mist, if they point to an inflationary trend taking hold."
• Sterling index strong near six-year high, buoyant Vs euro  
  Sterling held firm near a six-year high against a basket of currencies today, helped by its gains against the euro which was pegged back by chances that the European Central Bank could still opt for quantitative easing to fight low inflation. In contrast, the Bank of England was clearly on track for a rate hike either later this year or early 2015, leading to a widening in rate differentials between two-year British government bond yields and equivalent German Bunds . On Thursday, the ECB fleshed out the terms of the long term loans it will offer to banks in coming months and kept the possibility of fighting disinflationary pressures with a large-scale asset purchase programme on the table. These measures would lead to an expansion of the ECB balance sheet that will see more euros flooding the system and driving down its value. The common currency was down 0.15 per cent against the pound , at 79.22, having hit a 22-month low of 79.18 pence earlier in the day. It was on track for its biggest weekly fall since mid-June. Against a trade-weighted basket of currencies, the pound was at 88.9 - its highest in almost six years. 
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