Friday’s US non-farm payrolls report came in much stronger than expected, and it got some traders questioning the intense chatter that the Federal Reserve will cut interest rates this month.
Much of the rally in global stocks in recent weeks has been driven by the speculation the US central bank would lower rates.
The all-important economic release showed that 224,000 jobs were added in June, which comfortably topped the 160,000 forecast that economists held. The unemployment rate edged up to 3.7%, from 3.6% - which was a 50-year low. The yearly average earnings rate held steady at 3.1%, and keep in mind the CPI rate is 1.8%, so US workers are getting a nice increase in real wages.
Some investors have fallen into the bad habit of viewing bad news as goods news, in that bad news for the economy is good news for the stock market. The respectable headline figures from the US jobs report, and the decent earnings number underlines the strength of the US economy.
Last month, James Bullard of the Fed said that an interest rate cut of 50 basis points would be overdone, and Jerome Powell stressed in independence of the Fed – which was clearly a dig at President Trump who has been calling for lower interest rates and a softer US dollar. The latest employment report casts shadows the likelihood of a rate cut this month, and some traders are reconsidering their bullish positions in equity markets.
Stocks in Asia lost ground overnight as concerns the Fed were going to become less dovish spread to the Far East too. A slight rise in political and trade tensions between Japan and South Korea are weighing on sentiment also.
On the back of the jobs report, the dollar index hit its highest level since mid-June as the update adds weight to the argument that the US central bank should hit on their hands when it comes to monetary policy. Gold’s inverse relationship with the greenback continues, and the metal took a knock in the wake of the non-farm payrolls update. Gold has been in a strong uptrend since April, and while it holds above the $1,382 mark, the wider bullish trend should continue.
Over the weekend, Greek voters went to the polls and the right-of-centre, New Democracy party, won the election, and are even tipped to take a majority. The party has pledged to lower taxes, and privatise some services.
The German industrial production report will be released at 7am (UK time), and economists are expecting 0.5%, which would be a big improvement on the 1.9% decline in April.
EUR/USD – has fallen back into the wider downtrend and a move back below 1.1200 might pave the way for the 1.1110 area to be retested. 1.1400 might act as resistance.
GBP/USD – has been driving lower since mid-March, and if the bearish move continues it might encounter support at 1.2365 region. The 1.2800 area might act as resistance.
EUR/GBP – has rebounded for over one month, and if it holds above 0.8800, it might bring 0.9000 into play. A move to the downside might bring the 200-day moving average at 0.8783 into play.
USD/JPY – has been in a down trend since late April, and if the bearish move continues it might target the 106.00 mark. Resistance might be found at the 50-day moving average at 109.02.