Daily analysis | 01 September 2017
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Today, investors will probably be sitting on the edge of their seats in anticipation of the US employment report for August. The consensus is for nonfarm payrolls to have risen by 180k, less than the 209k in July, but still a decent number consistent with further tightening in the labor market. Actually, bearing in mind that the ADP report showed that the private sector gained much more jobs than what was anticipated, we see the possibility for the NFP number to exceed its forecast as well. The unemployment rate is expected to have remained very low at 4.3%, while average hourly earnings are forecast to have slowed somewhat in monthly terms, but this would still drag the yoy rate slightly higher. Following the strong upside revision of Q2 GDP and the robust ADP print, another set of encouraging data could push higher the probability for another Fed hike this year.
However, we stick to our guns that the primary determinants of whether the Fed will indeed proceed with another rate increase this year may be inflation data. The minutes of the July gathering showed that the number of policymakers who are concerned with regards to inflation has increased, while data after that meeting showed inflation remained subdued, casting more doubts on whether the softness in recent months can indeed be attributed to idiosyncratic factors. In our view, a strong rebound in inflation is needed before rate-hike expectations rise materially and help the dollar reverse its latest downtrend. The next CPI data are scheduled for the 14th of September, less than a week before the Fed meets to decide on policy. Although a single improvement may not be enough to guarantee a September hike, it could revive hopes that more encouraging prints may allow that to happen in December.
USD/JPY traded lower yesterday after it hit resistance at 110.65 (R1). Nevertheless, the slide was stopped at 109.85 (S1). The pair continues to trade within the sideways range between 108.70 and 111.00 (R2), which keeps the short-term outlook flat in our view. Having said that, today’s jobs data, if strong, could help the pair rebound within the range and challenge once again yesterday’s high of 110.65 (R1). If the bulls are strong enough to break that level, we would expect them to aim for the 111.00 (R2) barrier, the upper bound of the aforementioned range.
Sources say that the strong euro increases chance of slower QE-exit
Despite Eurozone’s inflation accelerating by more than anticipated, the euro came under renewed selling interest on Thursday after sources familiar with ECB discussion told Reuters that “rapid gains by the euro against the dollar are worrying a growing number of policymakers”. They also noted that this raises the chance that that asset purchases will be phased out only slowly and that the ECB is highly unlikely to take any decision at next week’s policy meeting.
The reports poured cold water on expectations that the ECB may remove more dovish aspects from its forward guidance when it meets next week. Specifically, there was speculation that this time around, the Bank may remove from its statement the easing bias that QE can be expanded both in terms of size and duration if needed. EUR-traders now turn their attention to ECB Vice President Constancio’s speech, scheduled during the European morning today, to see whether his remarks will indeed confirm the aforementioned sources.
EUR/USD slid during the European morning Thursday following the Reuters reports. Nevertheless, the pair hit the key support of 1.1830 (S1) and during the US session, it rebounded to test 1.1920 (R1). We maintain the view that the broader path of the pair is to the upside as marked by the uptrend line taken from the low of the 17th of April. Nonetheless, we prefer to remain sidelined today as strong US jobs data combined with more EUR-strength concerns by Constancio could cause the rate to correct lower, even below the key support of 1.1830 (S1).
As for the rest of today’s events:
During the European morning, we get the UK manufacturing PMI for August. Expectations are for the index to decline marginally, but to remain at a healthy level. In any case, we don’t expect such a print to affect the BoE’s policy plans. We also get the final manufacturing PMI’s from several European countries and the Eurozone as a whole. In the US, besides the employment data, the ISM manufacturing PMI for August is also coming out and the forecast is for the index to tick down, but to remain at a healthy level. We think that this time, the ISM print may attract less attention than usual, as investors may still be digesting the all-important employment data.
- Support: 109.85 (S1), 109.40 (S2), 109.00 (S3)
- Resistance: 110.65 (R1), 111.00 (R2), 111.70 (R3)
- Support: 1.1830 (S1), 1.1730 (S2), 1.1660 (S3)
- Resistance: 1.1920 (R1), 1.2000 (R2), 1.2100 (R3)