Solid payrolls to put a floor for the dollar?

Next report will be published on 12th July, 2017

Solid payrolls to put a floor for the dollar?

Yesterday morning, one could have logically assumed that US data would drive USD trading. It turned out different. The German 10-year yield cleared the important 0.50% mark and interest rate differentials narrowed in favour of the euro. US data were mixed, but only of second tier importance for USD trading. EUR/USD rebounded north of 1.14 and closed the session at 1.1423 (from 1.1352). USD/JPY showed no clear trend as the rise in core yields was counterbalanced by a setback in global equities. The USD/JPY hovered sideways in the lower half of the 113 big figure and closed the session at 113.22.

This morning, Asian equities are joining the correction from WS yesterday, but the losses remain modest. Yesterday, USD/JPY showed no clear trading pattern. This morning, the pair again ignores the correction in equities. The pair profits from the rise in US and European bond yields and trades in the 113.65 area. EUR/JPY also extends its uptrend and is nearing the 130 barrier. The EUR/USD also remains well bid (1.1420 area).

Today, the developments in European bond and equity markets and the G20 still deserve attention as potential drivers for global FX trading but the US payrolls will take centre stage. We expect the payrolls to be solid (at least meeting the consensus estimate of 178 000 net additional jobs) despite yesterday’s disappointing ADP report. The average hourly earnings are expected to rise 0.3% M/M and 2.6% Y/Y. A gradual rise in wages could ease markets’ doubts on the Fed normalisation process. Such a scenario would give the US currency renewed interest rate support. Especially short-term interest rate differentials should re-widen than, which is USD supportive. If so, USD/JPY could rise further. Sentiment on the cross rate is improving as wider interest rate differentials have become at least as important as the swings in equities/sentiment on risk. The question is whether this pattern will continue in case of a ‘real’ risk-off correction. The recent high in EUR/USD should be confirmed as a solid resistance. Having said this, if we are wrong and the payrolls disappoint, the dollar remains very vulnerable.

Technical picture: USD looking for a bottom

A combination of hawkish ECB comments and weaker US eco data pushed EUR/USD above the 1.1300/66 resistance area last week with a new high at 1.1448. Next resistance is seen in the 1.15 area. LT-correction tops are coming in at 1.1616/1.1714. A break would end the long consolidation period that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area will be difficult to break for now. A return below the 1.13 area would be a first indication of a loss in upside momentum. 1.1119 is the next important support.

The USD/JPY rally ran into resistance in early May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair above the 112.13 correction top last week, but follow-through gains remain modest. So, the jury is still out. A sustained break above 114.37 would improve the ST-picture.

Sterling still driven by dollar and euro moves

Yesterday, there were no eco data in the UK today. So, sterling trading was driven by the overall rebound of the euro. The intraday gains of EUR/GBP remained modest though even as the pair regained the 0.88 barrier later in the session. The pair closed the session at 0.8806. Cable drifted cautiously higher yesterday, supported by the rise in EUR/USD. The pair closed the session at 1.2971. One shouldn’t draw firm conclusions from yesterday’s EUR/GBP price action. If anything, the modest rise of EUR/GBP suggests that underlying sentiment on sterling remained constructive short-term.

Today, the UK Halifax House Prices, the May production data and the trade balance data will be published. The data might have some intraday impact on sterling trading. However, data of the month of May are not that timely. So, they won’t change the market assessment on the BoE approach. Decent eco data might be a mildly supportive for sterling. However, we don’t expect them to help break key technical levels. The US payrolls might also trigger intraday volatility in the major sterling cross rates.

From a technical point of view, EUR/GBP set a minor top north of the 0.8854/66 resistance (2017 top). A sustained break didn’t occur, causing a correction on the recent EUR/GBP rebound. A return below the 0.8655 correction low would indicate easing pressure on sterling, but such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured.

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