Nonfarms in focus for the Fed

The dollar was once again in retreat last week, with the DXY index sliding 0.3%, closing at just 100.4. Even so, the greenback’s drift lower continues to look at odds with fundamentals. The final reading for Q2 GDP landed at 3.0% QoQ annualised, while the savings rate – which had looked anomalously low, was revised up 1.9pp, taking it to a level that looks much more sustainable. Meanwhile, 25bp rate cuts from both SNB and Riksbank matched expectations, though with markets speculating on the prospect of a larger move in both cases, this saw CHF and SEK attract a bid. The primary story of the week, however, was China. News of renewed stimulus efforts saw a bounce for currencies sensitive to Chinese growth conditions. While we remain a little sceptical regarding the longevity of this dynamic absent more structural economic reforms, efforts by Chinese authorities to stimulate growth are nevertheless welcome considering China’s underwhelming economic performance so far this year.

Next week, Fed easing and eurozone inflation should be in focus, alongside geopolitical risks. Taking these in reverse order, markets continue to watch the Israel-Lebanon border with a renewed sense of trepidation following the death of Hezbollah leader Hassan Nasrallah in an Israeli airstrike. On the data front, eurozone price growth looks set to slump, with weak growth weighing on demand conditions, an outcome that should see accelerated ECB easing bets and a retracement lower for the euro. The main event, though, is US jobs, with a payrolls report due on Friday. If this meets expectations, it should indicate the labour market has stabilised rather than softened further, an outcome supportive of a measured easing path from the Fed, and the beginnings of a recovery for the dollar.

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Authors: 

Nick Rees, Senior FX Market Analyst

María Marcos, FX Market Analyst

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