We got some encouraging signs from the latest US payrolls report on Friday, with the earnings component edging up to 0.3% on the month, to lift the year on year rate to 2.5%. Even so, this is one month's set of data, and is unlikely to convince USD bears that the rate path espoused by the Fed is still firmly 'on track', and in the wake of the numbers, the odds of another 25bp hike by end of year remain close to 50/50. It does however mean that the one way traffic can ease off a little, so whatever your thoughts on the economy further down the line, we can expect to see a little more ebb and flow in the price action for the majors, with the USD index surviving a test on the key support levels into 92.00.
On the data releases next week, we get a little more on the jobs market as Monday offers up the CB employment trends index, along with Fed Labour Market conditions. JOLTS on Tuesday is also one to watch out for, but non-farm productivity on Wednesday could add a little more insight on wage growth if this improves. Fed chair Yellen (amongst others) often cites the tight correlation between productivity and wages, so we have been keeping an eye on this on. Even so, the algos are more likely to react to the top tier numbers, and on Friday, the July inflation stats, with consensus looking for the headline year on year rate to pick up a few notches from the 1.6% print for Jun. The core rate is expected to hold 1.7%.
Underlining the turnaround in the greenback was the sharp reversal in EUR/USD, failing to reclaim the 1.1900 level and eventually getting dragged back under 1.1800 to test the low 1.1700's late Friday. At these levels, buyers stepped in ahead of the 1.1710-15 'breakout point' which suggests to some that we are about to establish a new trading range. This may be a little premature and simplistic, and we would not rule out a deeper retracement - as we expect to see elsewhere to varying degrees - but we can assume 1.2000 will be a tough ask at this stage unless we get fresh European data to turn the tide again.
EU wide, we get the latest Sentix Investor Confidence Index for Aug. Judging by the rampage seen in EUR/CHF, one would expect this to remain strong given the dormant cash sitting in safe, fee paying accounts looks to be flowing (in part) into Europe, with a number of asset classes offering value at depressed levels. The cross rate looks a little spent above the 1.1500 mark, but as yet, we see little reason for a marked turnaround as sentiment on Europe holds strong.
More specifically, German and Italian trade and industrial production figure stand out next week, especially with the impressive rise seen in industrial orders noted out of Italy.
If we do get a stronger correction in the EUR, key levels initially stand out at circa 1.1500 in EUR/USD, and 1.1250-1.1300 for EUR/CHF. Both levels leave more than enough room to maintain the uptrend, but after last week's numbers, the spot rate looks a little more vulnerable under the circumstances.
Against this, EUR/GBP has finally made a push through the resistance 0.9000 mark, but this was all down to the BoE announcements last week. There was a strong inclination that the MPC may have been erring on the side of preparing the market for a hike inside H2 of this year, but the vote split returned on 6-2 for unchanged with the outgoing (gone) Kirsten Forbes, and Andy Haldane remained on the cautious side despite some of his comments alluding to a switch over to Messrs McCafferty and Saunders who continue to advocate a move now.
Whilst the current UK data is resilient in the face of what lies ahead, governor Carney expressed the ongoing concern over the potential impact of the 'negotiated terms' for leaving the EU - something which in itself seems to have attracted lesser attention despite both sides citing little or no progress in the talks so far. One thing is for sure, and that is with so much uncertainty in the air, pushing GBP any higher from current levels is not going to be easy. Longer term valuation levels argue buying on the downside nearer 1.2500, caution dictates selling at the higher extremes.
For cable, we assume a 'range shift' from 1.2000-1.3000 to 1.2500-1.3500, and going into the BoE call on Wednesday, sellers were clearly in evidence south of 1.3300. We would not have expected any hawkish bias to have led to led to any material rate hike pricing further down the line, though since the meeting, deputy governor Broadbent believes the market is understating rate hikes, but this looks to be based on the 2-3 year forecast horizon and with a high degree of risk variables to factor in. EUR/GBP resistance higher up now lies in the 0.9200-0.9250 area, but we expect a slow grind up to these levels unless Brexit headlines - so far quiet- start hitting the wires again.
Data next week focus on the manufacturing and construction sectors, as we get the output stats for June on Thursday as well as the trade balance - currently an improved £11.86mln deficit.
Sticking to the continent, and Thursday, we also get the latest Norwegian inflation stats followed by industrial production in Sweden. Swedish data has been very strong of late - indeed year on year industrial production as of May stood at 8.0%, with orders up at 7.6%, and after the strong 4.0% rise in GDP reported last week, more of the same is expected. Still no outright differentiation to note however, as firmer Oil prices support the NOK and keep NOK/SEK tight in the mid 1.0200's for now.
Oil prices have also proved supportive for the CAD at these levels, but clearly the interest cycle is now driving sentiment, with the BoC 25bp hike followed up by expectations of more to come based in central bank rhetoric backing up the data. Headwinds that lie ahead include the impact of the rise in implied rates on the housing market, with recent entrants likely to be stretched given the prices they have had to pay. Early signs that in some areas prices are heading lower - or moderating at least - and this alone could prompt the BoC to take a slightly softer line after such a sharp change in sentiment.
It also won't be long before the NAFTA talks are thrust into the headlines, and while the net effect of the tri-party accord has been beneficial to the US and Canada in equal measure over the years, the unnerving factor may impact sentiment at various points in the negotiations. Mexico is naturally more concerned.
For now, we look to have a base set ahead of 1.2400, with the upturn pushing into the upper 1.2600's. The Canadian jobs release was also a healthy one, and continuing the positive theme set out in preceding reports, but we also saw the trade deficit widen out by considerably more than expected, and along with the spot overstretch seen in the tight time frame achieved, the correction here may well have the legs for 1.2750-1.2800, but it will be a choppy ride from here. Nb, Canada off on Monday; Civic day.
Onto the traditional risk currencies and pairings, JPY exchange rates have been relatively well contained amid the geopolitical concerns which dominate. We will see how USD/JPY and the rest of the pack respond to the sanctions imposed on North Korea, but on recent evidence, we expect very little if at all. USD/JPY in particular has been very orderly of late, and we hit strong demand into 110.00 last week while 112.00 higher up looks to be the first major resistance point if the usual risk-on mood in FX picks up again. EUR/JPY looks heavy on moves through 131.00 at present, and AUD/JPY and NZD/JPY have both backed off better levels in recent weeks, but we should get as much, if not more price action in AUD/USD and NZD/USD in the week ahead.
On the economic front, plenty of second tier data out of Japan including machinery orders, but none of this really matters with respect to currency and rates, where the inflation rate is way off target and underpins the current BoJ policy stance for some time to come. In China, trade data in the middle of the week will be of greater interest rather than inflation, while we also get levels on FX reserves at the start of the week.
NZ is where we have the only central bank action to look to, and the market will be looking out for notes on whether the RBNZ are duly concerned over USD exchange rate levels. Against the AUD, we remain at historically higher levels as we struggle to push back above 1.0700, but having pierced 0.7500 vs the USD, we should least get the cautionary warnings on the negative impact on growth should we push higher still. We have since dipped (very) briefly under 0.7400, so expect the rhetoric to be calm and advisory for now, as was the tone adopted by the RBA in their statement last week. The RBNZ are also set to keep rates unchanged, especially in the wake of the weaker than expected jobs data for Q2.
AUD continues to hold comfortably above its respective breakout point at 0.7850 or so, but we did see the USD side of the equation testing 0.7900, and there are clear comparisons here (in price action) to that of EUR/USD into 1.1710-15 as noted above. On the Australian data schedule, the AIG construction index offers some early input in Q3 growth, with lending data out on Tuesday. RBA assistant governor Kent speaks on Tuesday, governor Lowe on Thursday. 
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