A far better-than-expected non-farm payrolls jobs report led to further unwinding of a deep interest rate cut expectation, which sent the dollar higher and treasuries lower.

The gold price slid against the strong US dollar, despite heightened geopolitical tensions surrounding Iran’s uranium enrichment programme announced on Sunday.

June’s US non-farm payrolls came in at 224k, smashing the consensus forecast of 160k, and also marked a sharp rebound from the previous month’s reading of 75k. This underscores the strength of the US employment market, even though most of the job gains were from the service sector, while manufacturing and construction remained lacklustre. The hourly wage growth came in at 0.2% month-on-month, falling 0.3% short of expectations, while unemployment rates rose slightly to 3.7% as a result of higher participation rates.

A fabulous jobs report reduces the likelihood of a deep interest rate cut at the FOMC meeting at the end of July. However, markets still priced in a 95% likelihood of a 25bps rate cut and 5% chance of a 50bps cut. This Wednesday’s Fed meeting minutes and Powell’s testimony will be a key event to watch for clues of any change in their monetary policy outlook.

Asian equities might face some headwind this week as unwinding activities kick in. Recently, market rallies have reflected many positive expectations, such as the G20 meeting, the Fed rate cut and a dovish central bank head and ignored a weaker fundamental outlook. If US-China trade talks stall or if the Fed fails to meet market expectations in cutting rates, unwinding activities will start to kick in.

Crude oil prices are likely to get another boost from the recent escalation in tensions between the US and Iran, following the Islamic country’s announcement that it will breach the uranium enrichment limit set in a nuclear deal back in 2015. This is widely viewed as a retaliation policy against recent US economic sanctions.

Recently, crude oil prices were suppressed by a slash in global energy demand and rising US shale oil production, which offset the effect of a nine-month extension in Opec+ production. A further escalation in geopolitical tensions in the region may lead to adverse consequences and may disrupt sea bound oil shipments from the gulf region. Technically, Brent oil has found support at around $63.6 and the immediate resistance can be found at $65.8.

US Dollar Index chart – Sep 2019

 

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