07.08.23: US and China Inflation Countdown to Steer Near-Term Sterling and Euro Moves against the Dollar
The global economy and monetary policy calls from major central banks will continue to be crucial for overall markets in the short term.
The latest US jobs data has provided some support for all viewpoints surrounding the US economy.
There was evidence of a slowdown in payrolls growth for the month which will maintain the potential for a controlled slowdown in the economy.
There will also be hopes that a slightly less robust economy will curb upward pressure on wages inflation and allow a less hawkish Federal Reserve policy stance.
The wages data in this release, however, will also support the case of more hawkish views that wage growth will be stubborn which will feed through into persistent inflation and force a more hawkish Fed policy stance.
Chris Weston head of Reseach at Pepperstone commented; "There was a narrative in there for everyone, depending on your bias. We are seeing a cooling of the labour market, but it's not collapsing. It's doing what we hoped it would do."
At this stage, markets still expect no more Fed rate hikes, but the Fed is still pushing the narrative that further rate hikes are likely to be needed.
This conflict will feed through into market volatility across all asset classes as investors react to individual data releases.
In this context, the market focus will shift quickly to the latest US inflation data due on Thursday.
China’s inflation data on Wednesday will also be important for market sentiment.
The underlying tone is likely to be one of consolidation and position adjustment ahead of the inflation data releases, especially with summer trading doldrums.
Pound US Dollar Exchange Rate Outlook
There was little net change in UK yields on Friday which tended to dampen independent Pound moves with global developments tending to dominate.
The Pound to Dollar (GBP/USD) exchange rate posted strong gains after the US jobs data and posted highs just above the 1.2790 level.
GBP/USD was unable to hold the gains and retreated to below 1.2750 with a further retreat to 1.2725 on Monday.
The latest UK construction data was stronger than expected, but the residential sector remained in contraction and there has also been evidence of a softer labour market.
The Bank of England will be hoping that a softer labour market will curb upward pressure on wages and cap underlying inflation.
Global risk trends will also be an important element for the Pound in the short term.
Overall, GBP/USD is still liable to drift lower in the short term as hedge funds continue to draw back from over-extended long positions, especially with Bank of England rate expectations edging lower.
Euro (EUR) Exchange Rates Today
There were no major Euro-Zone data releases during Friday.
There were, however, comments from the ECB that underlying inflation appears to have peaked. The comments increased speculation that the ECB would not increase interest rates at the September policy meeting which curbed potential Euro support.
The Euro to Dollar (EUR/USD) exchange rate posted gains after the US jobs data with highs just above 1.1040.
It failed to hold gains, however, and traded below the 1.1000 level on Monday.
Overall confidence in the Euro-Zone outlook will remain fragile which will sap net Euro support.
Given the Euro-Zone reservations, the Euro is liable to drift lower on the crosses with EUR/USD also edging lower, although relatively narrow ranges will tend to dominate at this stage.
US Dollar (USD) Exchange Rates Outlook
According to the BLS report, US non-farm payrolls increased 187,000 for July compared with expectations of just above 200,000 while the June increase was revised down to 185,000 from the 209,000 reported originally.
The unemployment rate edged lower to 3.5% from 3.6% with the participation rate unchanged on the month while the number of employed increased over 260,000 on the month.
Average hourly earnings increased 0.4% on the month compared with expectations of 0.3% with the year-on-year increase unchanged at 4.4%, above forecasts of 4.2%.
A slowdown in payrolls growth underpinned hopes for a soft landing in the economy, but the slightly higher than expected rate of growth in wages increased concerns over stubborn inflation.
Markets overall continued to expect that the Federal Reserve will not increase interest rates further this year.
There was, however, still hawkish rhetoric from Fed speakers with Governor Bowman stating that interest rates would still need to increase further if inflation progress stalled.
The dollar lost ground in immediate reaction to the data, but recovered ground due to the wages data.
Overall risk conditions and the degree of confidence in the international economy will also remain important for dollar moves in global markets.
In this context, Chinese developments will be important with net dollar support if there is no sign of further policy stimulus from Beijing.
Pepperstone’s Weston added; "It's hard to see the pullback being big across the dollar pairs, because fundamentally the U.S. has still got the best growth, you got a central bank which is still very much data dependant, and I think there are risks this week that the CPI number comes out above expectations.”
Other Currencies
The Canadian labour-market data recorded an employment decline of 6,400 for June after a 59,900 increase the previous month and compared with expectations of a 24,000 increase.
The unemployment rate edged higher to 5.5% from 5.4% and in line with market expectations.
The Canadian dollar dipped lower after the data with the Pound to Canadian dollar (GBP/CAD exchange rate jumping to near 1.7070 before a retreat to 1.7030.
Overall Sterling volatility eased on Friday with markets tending to focus on global developments.
The Pound to Yen (GBP/JPY) exchange rate retreated to lows near 180.50 before a tentative recovery to 180.90.
The Pound to Swiss franc (GBP/CHF) exchange rate also settled around 1.1135 as tight ranges prevailed.
There were choppy trading conditions in equity markets which had a significant influence on commodity currencies.
The Pound to Australian dollar (GBP/AUD) exchange rate hit lows at 1.9335 before a tentative net recovery to 1.9355.
The Pound to New Zealand dollar (GBP/NZD) exchange rate edged lower to 2.0870.
The Day Ahead
There are no major data releases on Monday with a relatively light calendar, although markets will be monitoring comments from Federal Reserve speakers.
Overall moves in equity markets will remain an important influence on currency markets.
Comments from Bank of England chief economist Pill will be monitored during the day.