Today, a disappointing US monthly jobs report could push the DXY Index below 105. DXY fell towards 105 in the past two days after failing thrice to break above 106 over five sessions. The Fed played down May’s stronger-than-expected nonfarm payrolls of 272k vs. 165k in April. Instead, it paid more attention to the Beveridge curve, i.e., rising job vacancies lifting May’s unemployment rate to the 4% it projected for 4Q24. Fed Chair Jerome Powell said the Fed was ready to respond if US jobs weakened unexpectedly. Hence, a continued rise in unemployment above 4% in June is significant, especially if average weekly earnings growth declines below 4% YoY for the first time in three years. Consensus expects NFP to drop below 200k to 190k.



Once considered exceptional, the US economy has witnessed a significant downgrade in its growth outlook. Over the past fortnight, the Atlanta Fed GDPNow model halved its GDP growth forecast for 2Q24 to an annualized 1.5% QoQ saar from 3.1%. Growth had already decelerated to 1.4% in 1Q24 from 3.4% in 4Q23. In May, retail sales excluding autos contracted at the same 0.1% pace as April and June, which will likely disappoint, too. The ISM Service PMI fell below 50 for the second time in three months to 48.8 in June, the worst reading since May 2020. New orders plunged to 47.3, its worst reading since December 2022. Against this background, the Fed is not contemplating a rate hike, but when to start lowering them, a message Fed Chair Jerome Powell will likely convey to the US Senate Banking Committee next week, on July 9.

US political leadership worries have taken centre stage, eclipsing the French and UK elections. President Joe Biden faces intense pressure over his age to abandon his re-election bid at the Presidential Elections on November 5. Although Biden has insisted on not quitting the race, many speculate that Vice President Kamala Harris might replace him, leading Donald Trump’s campaign to launch an all-out assault to discredit her. America is looking at four more months of political uncertainties vs. the end of the French and British elections this week, further underlining the urgency of the situation. 

EUR/USD started July on a firm note, appreciating 0.9% to 1.0812 in the first four days. Markets became less nervous due to doubts about the far-right National Rally Party gaining an absolute majority at this Sunday’s second round of the French elections. The risk premium denoted by the 10Y bond yield differential between French and German bonds peaked at 82 bps on June 27 and narrowed to 67 bps yesterday, its narrowest since June 12. EUR was also supported by the European Central Bank’s wait-and-see stance after its first rate cut on June 6.



Conversely, GBP/USD rallied by 0.9% to 1.2760 yesterday from 1.2645 last Friday. Apart from a weaker USD, markets have warmed to the idea of the opposition Labour Party’s landslide victory ending years of political and economic uncertainty under the Conservative Party following the 2016 Brexit Referendum. Labour leader Keir Starmer ruled out the UK rejoining the three blocs – the EU, the single market, or the customs union – within his lifetime. However, Labour may seek better trading arrangements by signing up to EU rules in specific sectors such as agriculture, food and chemicals. On monetary policy, the OIS market is pricing a 62.4% chance of the Bank of England lowering its bank rate by 25 bps to 5% at its meeting on August 1. This may not hurt GBP much if the USD gets dragged lower by this month’s US jobs and inflation data fuelling expectations for a Fed cut in September. By the way, GBP was the only DXY component that appreciated (by 0.2% YTD) this year.



AUD/USD bottomed below 0.64 on April 19 and rose above 0.67 yesterday. The rally was impressive, considering how the AUD bucked the depreciation in the JPY and CNY, the currencies of its two largest trading partners. Since April 19, the currency pair has appreciated by 4.8% to 0.6726, leading gains in the currency markets on Australia’s relatively stronger data vs. the US. Between April and May, Australia’s CPI inflation hit a six-month high of 4% YoY, while the US’s PCE inflation fell to a three-month low of 2.6% YoY. Over the comparable period, the unemployment rate declined to 4% from 4.1% in Australia but increased to 4% from 3.9% in the US. Australia’s retail sales growth accelerated to 0.6% MoM from 0.1%, but US retail sales ex-autos contracted by the same 0.1% MoM pace for a second month. Interest rate futures are not ruling out another hike by the Reserve Bank of Australia this year. Although the RBA kept the cash rate target unchanged at 4.35% at its meeting on June 18, the RBA minutes showed the committee considering a hike on upside inflation risks. Conversely, the futures market has increased the odds of a Fed cut in September to 70% from 50% last Friday.


Quote of the day
“Good luck is when opportunity meets preparation, while bad luck is when lack of preparations meets reality.”
     Eliyahu Goldratt

5 July in history
Isaac Newton’s great work Principia, outlining his laws of motion and universal gravitation, was published in 1687.

 

Philip Wee

Senior FX Strategist - G3 & Asia

[email protected]