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European Session – US dollar rallies after solid ADP jobs data, euro weighed by Eurozone inflation data

Eurozone inflation data today will likely add more fuel for the ECB to step up stimulus at Thursday’s policy meeting. The year-on-year flash headline inflation number was unchanged at 0.1% which was below forecasts. The market had anticipated a 0.2% increase. The core inflation rate slowed to 0.9% from 1.1%.

This is not good news for the ECB since fighting low inflation is proving to be one of its greatest challenges and could likely be a reason for it to be very accommodative in its meeting tomorrow. There are expectations the central bank will cut the deposit rate by 10 basis points but there is also talk of a two tier rate cut on the deposit rate, such as a 20 basis point rate cut for deposits above a certain threshold. In addition to lowering rates, there are expectations for an expansion or extension to the current asset purchase program.

The euro ticked up to a session high of 1.0631 before running out of steam and fell to 1.0561 after the Eurozone CPI data.

Sterling dropped to a new seven-month low of 1.4952 after a second poor UK PMI survey. Construction PMI disappointed today after yesterday’s manufacturing PMI. The construction PMI fell to 55.3, the weakest since April, from 58.8. A reading of 58.2 was expected. The focus now turns to the services PMI tomorrow.

Meanwhile a stronger dollar also helped in pushing the euro and the pound lower today. The US ADP jobs report today was much better-than-expected, showing that private employers added 217,000 jobs in November. Expectations were for a gain of 190,000 jobs. Last month’s number topped the 196,000 positions created in October, a figure that was revised upward from the initially reported 182,000 jobs.

Today’s private jobs report follows Tuesday’s dismal US ISM manufacturing PMI which came in at the lowest level since June 2009. The market shrugged off the poor ISM data and the dollar began to recover against the yen today and rallied sharply after the ADP report, rising to a high of 123.40, the highest in almost two weeks. The solid jobs data today will likely firm market expectations of a Fed rate hike this month. The focus now turns to Friday’s all-important US jobs report – the nonfarm payrolls.

The Canadian dollar strengthened after the Bank of Canada kept its benchmark interest rate steady at 0.5%. After two rate cuts this year, the BoC decided to stand pat for the third straight time. The greenback tumbled against the loonie after the announcement to 1.3360 from 1.3406.

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