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European Session – Dollar broadly firmer on Fed rate hike prospects after upbeat US ADP jobs data

The dollar was strong against its major counterparts on firmer US Treasury yields and on the prospects of a rate hike by the Federal Reserve in December, especially after marginally stronger US jobs data today.

The euro declined against the dollar for a second day to reach a new three-month low due to an increasing divergence of monetary policies between the ECB and the Fed. ECB President Mario Draghi reaffirmed his dovish stance on Tuesday and said the ECB will consider increasing stimulus at its December meeting.

Eurozone data today on services and composite PMI were modestly better-than-expected but were generally disregarded by the markets and had no impact on the single currency as focus remained on the central banks.

The composite PMI for the euro area, which includes both services and manufacturing, rose to 53.9 in October from a prior 54.0, putting the Eurozone on track to record 0.4% GDP growth in the final quarter of the year. Services PMI was only very slightly weaker in October to give a final reading of 54.1 versus the preliminary estimate of 54.2.

The euro fell to 1.0862 as the US session came around, mostly due to the firmer dollar. It had hit as high as 1.0967 in Asia.

Services PMI data were also out of the UK today, which beat expectations to rise sharply to 54.9 in October from 53.3 in September. This beat estimates for a reading of 54.5. The bullish response to a stronger services PMI was short-lived. After hitting a high of 1.5444 after the data, sterling fell against the broadly stronger dollar to 1.5361. There is also upcoming risk for the pound on Thursday when the Bank of England announces its policy decision and publishes its Quarterly Inflation Report. While no policy change is expected, what will be more important to focus on will be the MPC vote count to see how many policy makers will be in favour of a rate hike.

There was a raft of US data out today which generally helped the dollar rise against the yen to 121.54 – a more than two-month high.

First came the ADP private jobs report which was stronger-than-expected at 182,000. The market was expecting a number of 180,000. Even with the previous month being revised down from 200,000 to 190,000 it was largely ignored for the sake of the headline number.

US trade data were also better and saw an improvement in September as the deficit shrunk from $48.0 billion in August to $40.8 billion – a 5-month low.

US non-manufacturing ISM data was up in October to 59.1 from 56.9 in September and above the 56.5 expected.

Fed Chair Janet Yellen spoke in front of the US Congress today on regulatory matters but did not comment on monetary policy or the outlook for the economy in her prepared remarks.

The next risk event for the dollar will be Friday’s nonfarm payrolls report.

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