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US dollar in focus, after Friday payrolls bounce

A major concern at the start of this year was the worry that a strengthening US dollar and a tightening US Federal Reserve might cause problems not only for US companies’ overseas earnings, but also the effect it would have on emerging markets.

The fact that this hasn’t happened is as much to do with the lack of inflation as with the ongoing political turmoil in Washington DC which has punctured all the optimism surrounding the Trump reflation trade, and the prospect of a significant fiscal stimulus, and seen the US dollar index slide 8% so far this year, despite Friday’s strong rebound.

Despite all of this the US labour market has continued to improve, with the unemployment rate dropping to another multi year low of 4.3%, after payrolls showed a gain of 209k in July, while wages data managed to hold steady at 2.5%.

This goldilocks payrolls report had the effect of calling a halt to the recent US dollar declines and a first weekly gain since the beginning of July, while also pushing the Dow to its 8th consecutive record close.

Another positive effect of the US dollar rebound was a rebound in European markets which have found progress difficult as a result of the recent rise in the euro to two and half year highs. Friday’s sharp slide in the single currency, its worst single day fall this year, helped push the DAX and CAC40 off their lowest levels since early April.

The wider question with respect to Friday’s rebound is whether it will materially alter sentiment surrounding the US dollar which has gone from being overwhelmingly bullish at the beginning of the year to overwhelmingly bearish in a short space of time.

This heavy bias towards the downside could result in a squeeze of US dollar short positions and prompt some relief for European equity markets over the next few days, however it is unlikely to change the longer term direction for the US dollar, which unless the Trump administration gets its act together, could well have further to fall.

This is likely to be the main focus this week along with the latest China trade data for July, which is likely to offer important clues as to the health of the wider global economy. Recent data has shown that exports have improved markedly as demand in Europe and Japan has picked up, and this trend is expected to continue.

Imports have also improved along with internal demand, not only in consumption but also for commodities like iron ore which once again has continued its rebound today after its sharp fall at the end of the first quarter of this year.

We also have more US inflation data later in the week, and improvements here could well help reverse some of the negativity surrounding the US dollar which has weighed on it since the Fed last raised rates at its June meeting.

It’s also likely to be another important week for crude oil as prices managed to hold near to recent two month highs, despite rising US production and record OPEC exports in July.

With Libya and Nigeria exempt from the recent output cap this week’s technical meeting in Abu Dhabi by OPEC and non OPEC members to discuss measures to help boost compliance isn’t likely to move the dial that much in so far as helping prices at their current levels.

EURUSD – Friday’s sharp fall took the euro back below its 200 week MA at 1.1795, and calls into question the imminent prospect of a move towards 1.2000 for now. Support remains back at the 1.1610 level, and we could see a slide back here unless we get back above the 1.1820 level. Only a break below the 1.1480 area opens up a pullback towards the 1.1300 area.

GBPUSD – could well see further falls here after the key day reversal last week. The pound still has support just above the 1.3000 level, with only a drop below 1.3000 opening up a retest of the 1.2900 level.

EURGBP – holding below the November 2016 highs at 0.9050 for now, but we need to hold above the 0.8980 area to challenger the 0.9300 highs of last year. Support at the 0.8980 area needs to hold to prevent a pull back to the 0.8870 area.

USDJPY – having found support at the 109.80 area we need to see a move back towards the 111.30 area to stabilise and shift the onus away from a test of 108.20, and towards a return to the 112.30 area.

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