Forex Today: A cautions tone ahead of NFP

 It's NFP Day. During the Asian session, the Reserve Bank of Australia will release its Monetary Policy Statement, following Tuesday's pause. On European hours, Germany will report Factory Orders and Eurostat will release Retail Sales data. Later, Canada and the US will release their employment reports.

Here is what you need to know on Friday, August 4:

The US employment report is due on Friday, with Nonfarm Payrolls expected to have risen by 200,000 in July, below the 209,000 recorded in June. The Unemployment Rate is expected to remain at 3.6%, and Average Hourly Earnings are expected to rise at an annual rate of 4.2%. These numbers will close a week full of employment figures that have so far shown small signs of softening. The NFP report will be closely watched and is expected to trigger volatility in the markets.

NFP Preview: Forecasts from 9 major banks, moderate downward trend in job growth

Data released from the US on Thursday showed that Initial Jobless Claims rose to 227,000 for the week ended July 29, as expected. Q2 Unit Labor Costs rose at a rate of 1.6%, below the expected 2.6%, and Q1 was revised from 4.2% to 3.3%. Factory Orders rose by 2.3% in June, in line with expectations, while the ISM Services PMI declined from 53.9 to 52.7, below the estimated 53.

Analysts at Wells Fargo on US Productivity:

Productivity growth bounced back strongly in Q2, surpassing expectations and rising at a 3.7% clip. Over the past year, output per hour worked has risen 1.3%, the first positive one-year gain since late 2021. The improving trend in productivity along with slowing nominal wage growth points to inflationary pressures from the labor market starting to subside. 

US economic figures had limited impact on the US Dollar, as caution prevailed across markets. US stocks finished modestly lower, and the US 10-year Treasury yield jumped to 4.17%, the highest since November. The US stock market continues to trend lower, following Fitch's credit downgrade, as investors appear to be taking profits after the rally that began on July 10.

The US Dollar Index hit fresh weekly highs but later declined, ending a five-day positive streak, trading around 102.50. EUR/USD hit monthly lows below 1.0950 but then rebounded, ending flat near 1.0950. Germany will report Factory Orders and the Eurozone will release Retail Sales data on Friday.

The Bank of Japan announced a second unscheduled round of bond buying to cap the increase in Japanese Government bond yields. USD/JPY reached a monthly high just below 144.00 before turning to the downside, ending around 142.50.

As expected, the Bank of England (BoE) raised its key rate by 25 bps to 5.25%, which is the highest level in 15 years. There was a three-way split on the Monetary Policy Committee, with two members voting for a 50 bps hike and one member for no change. It is not clear what the BoE will do next, and there will be two monthly inflation reports before the September meeting. The pound weakened moderately after the decision, with GBP/USD bottoming at 1.2620, the lowest level in almost five weeks, before bouncing to the upside above 1.2700.

Analysts at TD Securities on BoE:

Language around the hike suggests the MPC is preparing to reach a terminal rate soon; we continue to expect 25bps hikes in both September and November, but the probability of a November hike, while still our base case, is now lower.

AUD/USD finished moderately higher after falling sharply on the previous two days. The trend remains to the downside, but the pair was able to hold above 0.6500. The Reserve Bank of Australia (RBA) will release its Statement on Monetary Policy, including new macroeconomic forecasts.

USD/CAD rose for the third day in a row but the bullish momentum faded. The pair was unable to break above June highs and retraced towards 1.3350. Canada will report employment data on Friday, with employment change expected to be positive at 21,100, following a surge of 59,900 in June; and the Unemployment Rate is expected to rise modestly from 5.4% to 5.5%.

USD/CHF declined after rising for five consecutive days, falling to 0.8730. Switzerland reported a decline in the annual Consumer Price Index (CPI) to 1.6%, the lowest since January 2022.