USD
After Fed Chair Powell put the labour market in focus on Wednesday evening, yesterday brought some unwanted developments. Initial jobless claims overshot expectations by 13k, shortly followed by a grim set of ISM Manufacturing PMIs where the employment sub-index sank from 49.3 in June, to just 43.4 last month. All told, the data added further weight to the narrative that the FOMC is turning a soft landing into something more sinister, with growing risks that overly tight policy will see the US economy slow by much more than is needed to return inflation to target. This left traders to price in three further FOMC rate cuts in the second half of the year, implying 25bps of easing at every meeting, while equities have also nosedived as a risk-off tone has gripped markets. Even so, growing recession risk is keeping the left-hand side of the dollar smile open, leading the broad dollar to finish yesterday’s session up by 0.3%, with JPY and CHF also benefitting from decent haven bids. Whether or not this continues today, all hangs on the July jobs report, published this afternoon. Markets are looking for a headline nonfarm payroll print of 175k. If today’s readings match expectations, keeping a soft landing in play, then markets are likely to unwind some of yesterday’s dollar strength. A decent set of misses to either side, however, offers up the prospect of an extended dollar rally with both sides of the dollar smile now open and offering a path to further greenback appreciation.
EUR
While yesterday’s 0.3% EURUSD slide is hardly great news at first glance for the single currency, it still left the euro to outperform most other G10 FX, with only the New Zealand dollar delivering better returns once excluding typical safe-havens. With little news flow out of the bloc, this dynamic is likely to stay front of mind today too. Markets have continued to trade with a risk-off tone early this morning, with a US jobs report the key focus for this afternoon.
GBP
The BoE cut rates by 25bps as expected on Thursday but surprised with commentary and forecasts that skewed dovish. Unsurprisingly then, sterling spent the day trading under pressure, shedding 0.9% against the dollar and 0.6% against the euro. Despite this, markets continue to underestimate the speed with which the BoE is likely to cut rates in our view, with just 1.7 rate cuts priced for the remainder of the year. We think every meeting until Christmas is now in play given yesterday’s guidance. Moreover, if our expectations for a sharp slowdown in wage growth are realised over the coming months, accompanied by further disinflation progress, then we see a realistic possibility that the MPC ultimately delivers four cuts in total, though our base case remains three for now. In any case, this should keep sterling upside contained in the short term, with the pound likely to tread water between now and the September meeting. Over the longer term, however, lower rates should see growth differentials widen in favour of sterling appreciation, keeping GBPUSD and GBPEUR on track for 1.30 and 1.20 by year-end respectively.
CAD
US recession risks saw USDCAD climb through Thursday trading, a move that ultimately saw the loonie giving up 0.5% against the greenback. Moreover, given the continued risk-off mood visible across Asian markets overnight, we suspect that further equity weakness is likely to continue weighing on the loonie this morning as well. The key for USDCAD fortunes today, however, will be this afternoon’s US jobs report. Further signs of a slowdown in the US labour market are likely to supercharge a move higher for USDCAD, one that could well see the pair end the week trading north of 1.39.