Major Currency Pairs: Dollar Hits 6-Month High Against Yen

EUR/USD
The euro ended the week close to one-month highs against the dollar on Friday after stronger than forecast euro zone inflation data for this month eased concerns that the bloc is slipping into deflation. Eurostat said the annual rate of consumer inflation accelerated to 0.9% in November, after slumping to a four year low of 0.7% in October. Economists had forecast an annual increase of 0.8%. The slowdown in euro area inflation in October prompted the European Central Bank to cut rates to a record low 0.25% at its meeting in November. Another report showed that the euro zone unemployment rate fell to 12.1% in October, down from 12.2% in September, the first fall since February 2011. However, the youth unemployment rate in the region rose to record high of 24.4% in October. In the week ahead, investors will be focusing on Friday’s U.S. nonfarm payrolls report for November, amid expectations that the Federal Reserve will start to scale back its stimulus program at one of its next few meetings. Meanwhile, the outcome of Thursday's ECB policy meeting will also be in focus.

GBP/USD
The pound rose to 27-month highs against the dollar on Friday after the Bank of England said Thursday it was rolling back stimulus to the U.K. housing market, adding to indications that the economic recovery is deepening. The BoE announced Thursday that it is modifying its Funding for Lending Scheme, which was launched last year to boost mortgage lending, in response to what it called “evolving risks” to financial stability. BoE Governor Mark Carney said the Funding for Lending Scheme will no longer be aimed a house buyers and would only apply to businesses from January 2014. The Office for National Statistics said its second estimate of U.K. third-quarter gross domestic product was unchanged at 0.8% quarter-on-quarter, while the annual rate of growth was also unchanged at 1.5%. It was the fastest quarterly rate of growth in over three years. Consumer spending rose by 0.8%, the fastest pace since the second quarter of 2010, the ONS said. In the week ahead, investors will be focusing on Friday’s U.S. nonfarm payrolls report for November, amid expectations that the Federal Reserve will start to scale back its stimulus program at one of its next few meetings. Data on the U.K.’s dominant service sector and the latest rate decision by the BoE will also be in focus.

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USD/JPY
The dollar rose to its highest level against the yen in six months on Friday as expectations that the Bank of Japan will have to step up its monetary stimulus program pressured the yen lower. The yen remained under heavy selling pressure amid heightened expectations that the BoJ will have to implement further stimulus measures in order to meet its target of 2% inflation by 2015. On Wednesday, BoJ board member Sayuri Shirai raised doubts over whether the inflation target can be met because of downside risks to growth, adding that the bank was open to taking further steps if growth slows. In contrast, demand for the dollar continued to be underpinned by expectations that the Federal Reserve will start to taper its USD85 billion-a-month asset purchase program at one of its next few meetings. The yen slumped to almost five year lows against the euro, with EUR/JPY settling at 139.21, the highest level since June 2009. For the week, the pair jumped 1.46%.

USD/CAD
The Canadian dollar slumped to a two-year low against the U.S. dollar on Friday, as lower oil prices and expectations that the Federal Reserve will soon start to taper stimulus weighed. The Canadian dollar initially rose to session highs against the U.S. dollar after official data showed that Canada’s economy grew 0.7% in the third quarter, following growth of 0.4% in the previous quarter. On a month-over-month basis, the Canadian economy grew 0.3% in September, above expectations for growth of 0.1%. But the loonie, as the Canadian dollar is also known, gave up gains as demand for the greenback continued to be underpinned by the view that the Federal Reserve could start to unwind its USD85 billion-a-month asset purchase program before the end of the year. Lower oil prices also pressured the Canadian dollar. Nymex crude oil ended the month down 3.2% at USD92.72 a barrel as ongoing concerns over rising U.S. inventories and increased production levels weighed. Crude oil is Canada’s largest export and the country’s currency is very sensitive to fluctuations in crude prices. In the week ahead, investors will be focusing on Friday’s U.S. nonfarm payrolls report for November, for indications on the timing of a possible reduction in Fed stimulus. The U.S. is also to release revised data on third quarter growth. The outcome of the Bank of Canada’s latest policy meeting will also be in focus.

Written By: ICM Brokers