The EUR/USD outlook brightened as the dollar was sold in the aftermath of a mixed-to-weak US non-farm payrolls report.
So, the US jobs data was mixed and the probability of a rate hike in September fell to 13% from about 20% prior to the data release. Correspondingly, the US dollar and bond yields fell, gold rallied, and stocks stabilised somewhat. With the July jobs report out of the way, there are now 3 more major data releases left for the market to weigh until the FOMC meets on September 20. Until then, we will have one more jobs report in September, and two more CPI reports – the first of which is due next week. Any further weakening of CPI could cement expectations of a policy hold.
What will the markets focus on next?
Investors will turn their attention towards consumer inflation data, due next week on Thursday. US CPI inflation has fallen sharply in recent times, printing below-forecast readings in each of the past 4 months. Annual CPI fell to just 3.0% in June from around 6.5% at the start of the year, increasing the likelihood that interest rates have now peaked.
But services inflation remains high as strong wage growth continues to push up input costs. This is something that was highlighted in the NFP report, which showed average hourly earnings rising 0.4% month-on-month or 4.4% year-on-year, which was more than expected. Annual earnings have now increased by 4.4% in April, May, June and July. This shows that wage inflation is still going strong, and it is a concern for the Fed. This is especially the case for the services sector – which was also highlighted by the rise in prices paid index of the ISM services PMI.
So, there is a risk that CPI could overshoot expectations on Thursday. But with the manufacturing sector clearly struggling, and now jobs market softening a little, the Fed will feel that its policy is restrictive enough to help cool price pressures further. So, a small beat on the CPI front wouldn’t matter too much, I don't think.
Why had the dollar risen so much anyway?
This week’s earlier rally in the dollar had little to do with the Fed’s expected policy decision. It had a lot to do with the sell-off in US bond market, especially at the long end of the curve. This was triggered by that rating downgrade by Fitch, causing investors to demand more for the increased risks associated with holding Treasurys. While a US debt default is unthinkable, it could happen at some future point in time. So, we wouldn’t rule out the possibility of further increases in US bond yields in the near-term. It will be interesting to watch next week’s $103 billion bond auction. This will tell us a lot about investors’ willingness to hold government debt.
That said, the correction potential for the dollar is now high, and investors have already started selling their USD now that the jobs report has come out somewhat on the weaker side with a headline print of 187K vs. 205K eyed and considering the fact there were downward revisions to the tune of 49K in the prior jobs reports. Indeed, JOLTS reported the fewest jobs openings in over 2 year earlier this week.
EUR/USD outlook: Technical analysis
The EUR/USD broke Wednesday’s high of 1.1020 and therefore reclaimed the 1.10 handle again. This is a bullish reversal. Assuming there won’t be any further drama in late US session today, a close around current levels would point to further upside continuation in the week ahead. The next area of liquidity would be above last Thursday big bearish engulfing candle, where undoubtedly many bears will have their stops resting. On the downside 1.1000-1.1020 is now the key support range for the bulls to defend, with further support coming in around 1.0950. As things stand, the path of least resistance looks to be to the upside, we will concentrate more on the upside than downside levels in our future updates next week.
-- Written by Fawad Razaqzada, Market Analyst
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