The U.S. Dollar dropped sharply after a weaker-than-expected U.S.employment report increased the odds of additional quantitative easing by the Federal Reserve. The decline in the Greenback boosted the Euro and the British Pound to their highest levels since mid-May. Gold futures are trading at price levels not seen since March; however crude oil futures remain range bound.
Earlier today, the Labor Department said the U.S.economy added 96,000 jobs in August. This was well below economist pre-market estimates of 125,000. The weak number reinforces expectation of additional quantitative easing by the Fed; therefore, the today’s market action is reflecting the thought that the central bank will have to soon begin its third major bond-buying program. Since this action will in effect put more liquidity into the system, the U.S. Dollar is under pressure.
Besides the disappointing non-farm payrolls number, the U.S.unemployment rate also declined to 8.1% from July’s 8.3%. Although this drop is expected to be used for political reasons, it is not a positive development for the economy since the drop was triggered because people dropped out of the workforce.
Before the dollar even began its aggressive descent after the jobs data was released, the Greenback was under pressure because of fresh stimulus measures from China. This news drove up demand for higher-yielding assets.
In addition to expectation of additional stimulus, the EUR/USD was still being bolstered by Thursday’s announcement by European Central Bank President Mario Draghi detailing the central bank’s plan to buy an unlimited amount of Euro-Zone government bonds. This news continued to push down interest rates in Spain and Italy.
The weaker dollar is also driving up the GBP/USD. Talk of relaxing a few of the austerity measures currently curtailing economic growth in the U.K.is also helping to underpin the Sterling. Yesterday, the Bank of England refrained from additional asset purchases. More stimuli would’ve driven the British Pound lower. This news is also encouraging investors to buy the currency.
October crude oil is under pressure as expectations of a weak U.S.economy are leading investors to believe that demand for energy will remain down. Sellers appear to be controlling the direction of the market despite weakness in the U.S. Dollar. Typically when the Greenback declines, assets priced in dollars rise. Today’s action reflects the fear that inventories could continue to remain high.
Expectations of additional quantitative easing and the weaker dollar sent December Gold futures soaring to their highest level since March. Upside momentum is strong as investors continue to drive up demand for precious metals. With Europe and China announcing stimulus plans and the U.S.ready to implement another round of quantitative easing, gold investors appear to be pricing in the possibility of inflation in the future.