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US dollar under pressure ahead of US payrolls report

US dollar under pressure ahead of non-farm payrolls

We saw another day of record highs for US markets yesterday, with the Nasdaq and S&P 500 both making record closes. European markets also saw a solid if uneventful session, with the FTSE 100 closing at a two-week high.

Asia markets have seen a mixed session with Chinese stocks lower after the latest Caixin services PMI number for August slid sharply to 46.7, and its lowest level since May 2020. The Nikkei on the other hand rose sharply after Japanese PM Suga announced he would be stepping down over his handling of the Covid-19 pandemic, ahead of this years general election, as markets started to price in the prospect of another round of stimulus.

Moving to today’s European session, markets here look set for a cautious open, with the main focus on this afternoon’s US non-farm payrolls report for August.

Having seen the latest manufacturing numbers come in on a fairly solid footing earlier in the week, it’s now the turn of the services sector in Europe, the UK and US. In the case of the US and UK, we saw a significant drop off in services activity during August, from the recent flash readings. The main reason for the fall in UK services activity is the continued after-effects of the 'pingdemic', which hampered the economic activity of employees who were self-isolating due to being 'pinged' by the NHS Track and Trace app.

On the plus side, unlike July, businesses were more optimistic with respect to the outlook, with optimism over new job creation rising as the recovery picked up. Businesses in the sector have been hiring at their fastest rates in 25 years, although costs are also rising, due to staff and supply shortages.

In Europe, activity has also been slowing, albeit from slightly higher levels as summer starts to come to and end, with Spain services expected to slow to 61.4, Italy to come in at 58.4, while France and Germany are forecast to come in at 56.4 and 61.5 respectively.  

Today’s main event is the payrolls report this afternoon, and expectations over a decent number have been pared back somewhat after disappointing ADP payrolls earlier this week, as well as a contraction in the employment component of the ISM manufacturing survey. The big question is whether this really matters in the wider scheme of things, and in terms of US monetary policy the answer has to be probably not that much, particularly given the aftermath of Jay Powell’s comments last week at Jackson Hole, which laid out slightly more clearly the pathway to a tapering announcement, and which helped pull the rug out from underneath the US dollar.

As far as the July jobs report was concerned, there wasn’t much to dislike with strong gains of 943,000, as well as a decent upward revision to 938,000 for June, which sent the unemployment rate tumbling from 5.9% to 5.4%, while the underemployment rate also fell from 9.8% to 9.2%. A rise in the participation rate was also well received, although it was fairly modest, rising to 61.7%, still well short of the 63.4% pre-pandemic.

Even if today’s payrolls report falls short of expectations of around 725,000, given the weaknesses seen in the ADP and ISM, it's unlikely to be the end of the world given current elevated levels of job vacancies across the US economy. Like it did this week, the ADP payrolls report fell short last month, with a similarly weak 326,000 figure, only for non-farm payrolls to comfortably beat expectations two days later.

With the various unemployment and stimulus benefits coming to an end this month, with some states starting to remove them earlier, hiring trends ought to remain robust over the next few weeks. Even if they don’t, attention will soon shift to this month's Fed meeting, in terms of a timeline towards a reduction in the monthly asset purchase programme. A poor report won’t change the likelihood of a tapering of purchases, but it will affect the pace, timing and scope of one, potentially pushing it into next year. A poor number could also push the US dollar even lower, and on course for another weekly decline.

One of the major protagonists in the hawk’s camp has been Robert Kaplan of the Dallas Fed, who said that he remains very much focused on the data, saying he would be persuaded to pull back on a call for a taper if the data demanded it, however his comments last week would suggest that he remains to be persuaded of that. The labour market remains the key touchstone for most US policymakers, and another strong August number would certainly up the ante in that regard. Among the more dovish members, New York Fed president John Williams is one who is concerned about the lacklustre participation rate, given where it was pre-pandemic at 63.4%.

Today’s August report continues to come against a backdrop of prices that still remain elevated, but are slowing, and weekly jobless claims that are trending lower, with the mismatch between job openings and the participation continuing to prompt some head scratching amongst many Fed officials. We should get a better idea a month from now when the various emergency unemployment benefits have expired, and the schools have gone back, which means that people will then have to go out and earn money, rather than rely on stimulus payments.

Expectations are for a slight slowdown with 725,000 new jobs expected to be added in August, while the participation rate is expected to edge higher to 61.8%, as some US states pare back their emergency stimulus measures early. Unemployment is also set to fall further to 5.2%.

EUR/USD – continues to edge higher towards the July peaks at 1.1910, and behind that we also have 1.1975, 25th June highs. The 1.1780/90 area should now act as support for this to unfold. Below 1.1780 retargets the 1.1720 area.

GBP/USD – the current rebound from the August lows remains but continues to make progress. As long as we hold 1.3820, we can see a move towards 1.3900. Trend line support at 1.3750 needs to hold for the current rebound to continue, or risk a move back to the 1.3680 level. 

EUR/GBP – currently toppy near to 0.8600, with bigger resistance at the 0.8640 level with support currently near the 0.8560 area. Below 0.8550 retargets 0.8520. 

USD/JPY – currently going nowhere quickly, despite a brief move up to 110.40 early in the week. Currently have support at 109.70, as well as the 109.10 area. We need to see a break either side to determine the direction of the next move.

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