Firming US dollar & NFP to overshadow FOMC

<p>What promises to be the most important week of US economic releases before the “unofficial” start of summer is kicking off with a bang as […]</p>

What promises to be the most important week of US economic releases before the “unofficial” start of summer is kicking off with a bang as US consumer confidence hit a fresh 7-year high in July at 90.9, following June’s 86.4.  Consequently, the US dollar extends its 3-week winning streak ahead of the week’s key figures.

The main reason we expect the US dollar to extend recent advances (vs EUR, CHF & NZD)– rather than fail prematurely as was the case in early June, April or January–is the combination of broadening advances in US labour metrics and improving price indices (core PCE and CPI), all developments lending more credence to Yellen’s recent remarks that rates would be hiked earlier than anticipated if the economy improved at faster pace than anticipated.  Regardless of whether this changes in autumn (when post-taper uncertainty is at its highest), traders are most concerned with the current thinking, which shapes the paradigm.

The concentration of this week’s US releases/events increases chances for a USD-positive reaction, especially if Thursday’s release of flash July Eurozone CPI remains at +0.5% y/y and core CPI remains below 1.0% y/y. What had changed from four weeks ago is the ensuing rhetoric from ECB sources further supporting a weaker currency and the pickup in real US 2-year yields to -0.95% (highest since April) in from -0.99%, while real Eurozone 2-year yields remain at -0.47% and are likely to deteriorate after this week’s flash CPI. These dynamics are clearly EUR-negative.

US Jul ADP (Wednesday 8:15 ET, 13:15 BST)

The June reading of 281K was the highest since November 2012 and the 5th highest figure on record since the ADP was prepared in 2001. The latest figure is well above the 3-month moving average of 222K.Any reading below the anticipated 230K figure may slow USD’s rise as long as no break below 190K.

US Q2 GDP (Wednesday 8:30 ET, 13:30 BST)

The first release of the US Q2 advanced GDP (first of three releases) is seen rising to 3.0% q/q, following a 5-year low of -2.9% damaged by mostly bad weather. The report is based on yet to be collected economic data and is less current than FOMC assessment of the economy due later in the day.  Particularly worthy of note is the personal consumption component of the GDP report, expected to rise by 1.9% from a 4-year low of 1.0%. Potentially positive figures for the US currency could also emerge if the Q2 core PCE and Q2 GDP price index reveal figures of at least 1.9% and 1.8% respectively.

FOMC Statement (Wednesday 14:00 ET, 19:00 BST)

In theory, tomorrow’s FOMC statement may not trigger any particular bout of volatility in currency or equity markets as there is no post-meeting press conference by chairwoman Yellen and also due to the fact that Yellen addressed Congress on monetary policy less than two weeks ago. But Yellen’s remarks at her recent Congressional testimony indicating the Fed’s key rate would be hiked earlier than anticipated if the economy improved more quickly than anticipated. The odds that the FOMC will convey this thinking in tomorrow’s FOMC statement should shake off markets and somewhat re-awaken volatility. Instead of the FOMC using “if then” statements, it will most likely offer the usual 2-sided phrases of recognizing a faster improvement in labour markets, while continuing to play down inflation, in which case markets may give more weight to the positive side of things, considering recent jobs data.  We do not expect any disappointment in the Q2 GDP report (such as below 3.0% but above 2.8%) to sway the FOMC into leaning towards a negative tone.

US Jul NFP & unemployment rate (Friday 8:30 ET, 13:30 BST)

Aside from the last jobless claims hitting their lowest figure since since February 2006, US labour markets are already coming off a solid July employment report, showing one of the broadest improvements in employment creation (288K increase in non-farm payrolls, accompanied by a new six-year low in the unemployment rate of 6.1%). Although the labour force participation remained unchanged at a three-decade low of 62.8%, the U6 unemployment (marginally attached to labour force and part-time workers due to inability to find FT work) dropped to 12.1%, also the lowest since September 2008. NFP payrolls figures posted their the 45th consecutive month of job creation in the US, matching the third longest run since World War Two, and four months short of an unprecedented streak of jobs creation.

Friday’s July NFP release is expected at 231K, the sixth straight figure above 200K, following 288K in June. The July unemployment rate is seen unchanged at 6.1%, while average weekly earnings are expected to rise by 0.2% m/m, in line with the average of the past three and 12 months.  The employment participation will be closely watched, for whether it remains at a 36-year low of 62.8%. A combination of any rise in the participation rate combined with an NFP above 230K and no increase in the unemployment rate above 6.2% would be sufficiently positive for the US dollar and bond yields.

US July ISM manufacturing (Friday 10:00 ET, 15:00 BST)

The report may be overshadowed by the impact of the US jobs report, but any overshoot beyond the anticipated 56.0, following the 55.3 in June could support the greenback. The recent attention to inflation indices also means that a renewed jump back above 60 will boost the yield argument for the US currency.

These dynamics are endangering the short-term technical foundation of EURUSD as the pair nears a breakdown of the 24-month trendline support. Bearishness is also highlighted by the negative convergence between price and stochastic/momentum indicators, suggesting $1.3270 could be seen by week’s end.

US dollar index

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