Strictly speaking Friday’s payrolls report should have pushed the US dollar higher, and though it finished the week higher, the sharp fall heading into the weekend might suggest that we could be starting to run out of a little bit of steam, amidst concerns about declining global growth and falling inflation. Pretty much every component of the July payrolls report ticked the boxes needed for the Federal Reserve to potentially embark on an expected tightening cycle, as soon as next month. And yet despite the fact that there was little in the payrolls report to dissuade most in the market that a September rate rise won’t happen, there still remains the not insignificant fact that inflation still remains pretty much non-existent, and for a Federal Reserve who claims that it is data dependant to ignore the evidence in front of its eyes would be a big risk to take. The performance of US treasuries appears to be pretty instructive in this context with yields falling sharply across the longer end of the curve on Friday. July payrolls saw gains of 215k, while previous months were revised up 14k, and the unemployment rate remained at 5.3%. The participation rate remained anchored at a 38 year low, at 62.6, while average earnings grew modestly to 2.1%, slightly below expectations of 2.3%. Last week Atlanta Fed President Dennis Lockhart set the proverbial cat amongst the pigeons when he felt that there was a fairly high bar to not acting on rates in September, and that there would need to be a “significant deterioration” in economic activity to cause the Fed not to act. Friday’s payrolls report is likely to reinforce his views on this particular subject when he speaks later today in Atlanta. As if to reinforce the nagging concerns about the lack of inflation, both Brent and US oil prices continued to decline last week, their sixth consecutive weekly decline, while the latest data out of China at the weekend continued to point to an economy struggling to keep its feet, despite four cuts to bank reserve requirements, in the last six months, as well as benchmark lending rates which currently sit at record lows. Chinese imports declined 8.1% in July an increase in the 6.1% decline seen in June, while exports declined sharply as well, by 8.3% as demand from the EU and Japan showed sharp falls in excess of 12%. Even exports to the US saw a decline of 1.3%. Chinese factory gate prices also slid sharply by 5.4%, more than expected, reinforcing the weak demand and outlook and raising expectations about further easing measures. CPI prices did edge higher, but that was largely as result of higher pork prices. There also appears to be growing optimism that we could see some form of Greece bailout deal starting to take shape if reports at the weekend are anything to go by. Growing optimism amongst EU officials would appear to suggest that Greece had made significant concessions with respect to new austerity measures which could be voted on later this week, as the country looks to make a payment to the ECB of €3.2bn by 20th August. For any deal to come to fruition EU creditors would need to find a way to bridge the gap between the IMF and Germany about the thorny subject of debt relief, which could be a much harder nut to crack. German officials remain reluctant to commit to a quick deal preferring the option of further bridging finance, so that further guarantees can be obtained about the commitment of additional taxpayer cash to a country, that in some parts of Europe has used up a lot of goodwill. EURUSD – continues to be trapped in its sideways range, after failing to push below 1.0850 last week. A move through 1.1030 is needed to retarget the high of a fortnight ago at 1.1125, while a move below 1.0800 could well signal a move towards 1.0600. GBPUSD – the pound had a disappointing week last week and we could fall back towards the converging 100 and 200 day MA at 1.5370, but we still remain within the broader range of 1.5400/1.5700. The highs of the last five weeks at the 1.5680 level remains a key resistance on the upside. A move above 1.5700 has the potential to retarget the 1.5820 level. EURGBP – after failing to push lower last week we could well see a rebound to the 0.7120 area if we manage to hold above the 0.7020 area. The 0.6930 lows remain the key obstacle to further losses towards 0.6830. USDJPY – Friday’s failure to break through the 125.00 area prompted a sell-off back which could well see a move back towards the 123.75 area, and then 123.00. Only above 125.00 argues for a retest of the highs at 125.85. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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