US Dollar Index stays bid post NFP, GBP tumbles, UK recession fears grow

Week Ahead – RBA, BOC, ECB Rate Decisions - Elevated Volatility

Summary

The Dollar Index (DXY) which measures the value of the US currency against a basket of 6 major stayed bid, closing at 109.60 (109.45 Friday), following a mixed US August Jobs report.

American employers added 315,000 jobs in August, modestly beating economist’s median forecast of a 300,000 gain. The Unemployment rate, however, rose to 3.7% from 3.5%, disappointing expectations. US August Average Weekly Earnings (Wages) eased to 0.3% from a previous 0.5%.

Sterling (GBP/USD) was the hardest hit of the majors on growing fears of a UK recession due to long-term inflation expectations. At the close of trade in New York, GBP/USD settled at 1.1507 (1.1545). Overnight, GBP/USD hit a low at 1.1486, its lowest level since March 2020.

The Euro (EUR/USD) steadied to 0.9957, up modestly from Friday’s open at 0.9947 on reports that Russian energy giant Gazprom would increase gas shipments to Europe via Ukraine. Germany’s government announced a third relief package to help its citizens cushion soaring energy costs.

Risk leader the Australian Dollar (AUD/USD) slumped 0.65% to 0.6785 from 0.6835 on Friday, its lowest since mid-July. Broad-based US Dollar strength amidst hawkish Fed expectations have weighed on the Battler. The RBA meets on interest rates tomorrow.

USD/JPY was little changed, settling at 140.20 (140.22 Friday). Lower US bond yields amidst a risk-off stance buoyed the Japanese currency against the Greenback and other Rivals.

The Greenback gained modestly against the Asian and EM Currencies. Against China’s Offshore Yuan, the Dollar (USD/CNH) rallied to 6.9185 from 6.9160. The USD/SGD was little changed at 1.4028 from 1.4025 Friday.

Wall Street stocks tumbled as risk-off took over. The DOW finished at 31,375 from 31,662 while the S&P 500 fell to 3,928 from 3,965 Friday open.

Global bond yields eased. The benchmark US 10-year treasury rate dropped 6 basis points to 3.19%. The UK ten-year bond yield settled at 1.52%, down from Friday’s 1.56%.

Other economic data released on Friday saw Germany’s Trade Surplus climb to +EUR 5.4 billion, beating expectations at +EUR 4.6 billion, but lower than the previous +EUR 6.4 billion. Eurozone Headline July PPI (m/m) rose 4.0%, up from a previous 1.1%, beating estimates at 2.5%. US July Factory Orders fell to -1.0%, down from June’s 2%, and missing median forecasts at 0.2%.

EUR/USD – The shared currency stayed under pressure against the Greenback for most of Friday’s session, edging up at the close to 0.9957 from 0.9947 open. Overnight high traded for the Euro was at 1.0034 while the overnight low recorded was 0.9934 in choppy trade.

GBP/USD – Traders continued to pound the British currency lower against the broadly based stronger US Dollar. Sterling settled at 1.1507 (1.1545 Friday open). Growing fears of a UK recession as inflation expectations rise weighed on Sterling. The UK also announces its new Prime Minister later today. Overnight high traded was at 1.1589.

AUD/USD – The Aussie Battler tumbled on the market’s risk-off stance as sentiment soured. Overnight the AUD/USD pair plunged to 0.6779 lows from Friday’s open at 0.6835, closing at 0.6785. Overnight high traded was at 0.6855.

USD/JPY – Against the Yen, the US Dollar was little changed, finishing at 140.20 (140.22 Friday open). Overnight high traded was at 140.80 while the overnight low recorded was at 139.87 in choppy trade. In contrast to the 6-basis point drop in the US 10-year rate, Japan’s 10-year JGB was unchanged at 0.23%.

On the lookout

This week starts off with a light economic calendar amidst a bank holiday in the US and Canada (Labour Day). Australia kicks off with its August Global Services PMI (f/c 49.6 from 50.9), Australia’s AIG Construction Index (no f/c, previous was 45.3).

Japan follows next with its Jibun Bank Services PMI for August (f/c 49.2 from a previous 49.20). Australia releases its Final July Retail Sales (f/c 1.3% from 0.2% - ACY Finlogix). China follows with its August Caixin Services PMI (no f/c, previous was 55.5).

Switzerland starts off European data with its GDP Growth Rate (q/q f/c 0.4% from 0.5%; y/y f/c 3% from 4.4% - ACY Finlogix). France releases its August Services PMI (f/c 51 from 53.2 – ACY Finlogix).

Germany follows with its August Services PMI (f/c 48.2 from 49.7 – ACY Finlogix). The Eurozone August Services PMI follows (f/c 50.2 from previous 51.2 – ACY Finlogix).

The UK is next with its August Final Services PMI (f/c 52.5 from 52.6). The Eurozone July Retail Sales report follows (m/m f/c 0.4% from -1.2%; y/y f/c -0.7% from -3.7%).

France releases its July Retail Sales (m/m no f/c, previous was -1.2%). Finally, the UK rounds up today’s data releases with its August BRC Retail Sales (no f/c, previous was 1.6%).

Trading perspective

We can expect more FX volatility today and the week ahead with several central banks meeting on policy.

The Reserve Bank of Australia (Tuesday), Bank of Canada (Thursday morning Asia time) and the European Central Bank (Thursday evening Asia) all have interest rate decision meetings. All are expected to raise interest rates. The question is by how much.

Today though expect a slow start with the US and Canada on holiday. While the Dollar remains bid, expect profit taking and position adjustments to keep the Greenback’s topside limited.

Meantime, equities will remain pressurized. A rise in risk aversion is Dollar supportive, and will weigh on the Aussie, Kiwi and Asian and EM currencies.

EUR/USD – Expect the Euro to stay pressurised amidst broad-based US Dollar strength today. Its still a long way from today until Thursday when the ECB meets on interest rates. Immediate support today lies at 0.9925 followed by 0.9895 and 0.9865. Immediate resistance is found at 0.9960, 0.9990 and 1.0020. Look for another choppy ride. Likely range between 0.9900-0.9980. Sell rallies the preferred way to go.

AUD/USD – The Aussie Battler is under pressure in the current environment. Immediate support can be found at 0.6780 followed by 0.6750. As this is written, Asia has pushed the AUD/USD pair to a low at 0.6773. Immediate resistance is found at 0.6830, 0.6860 and 0.6890. Look for the Aussie to stay offered in a likely range today between 0.6770-0.6870.

GBP/USD – The Pound is sinking once again with most traders negative on the British currency. For today, look for immediate support at 1.1480 and 1.1450 to cushion further selling. On the topside, immediate resistance is found at 1.1530 followed by 1.1560 and 1.1590. Selling pressure will limit any GBP/USD rebounds, likely range today expected between 1.1450-1.1550.

(Source: Finlogix.com)

USD/JPY – The Dollar was little changed against the Yen finishing at 140.20 (140.22). Risk aversion saw demand for the Japanese currency balance out broad-based USD strength. The fall in US bond yields also limited any meaningful USD/JPY gains. For today, look for immediate support at 140.10 followed by 139.80. Immediate resistance is found at 140.50 followed by 140.80 and 141.10. Look for another choppy one with a likely range today between 139.80-140.80. Just trade the range on this one today, lots in it.

Looking ahead to another active week in the FX markets. Have a good Monday start. Happy trading all.