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NFPs in focus, USD slides
USD consolidates ahead of jobs report
Yesterday I argued that the dollar may have reached a bottom and that further weakness is not justified. Looking at the FX market this morning, it seems that the dollar’s bounce back is not for today as the greenback consolidated against most of its peers, unable to extend the modest gains of the last few days. There are several reasons for that. Beside expectations that the Fed will have to back-pedal on tightening and balance sheet unwinding amid stalling economic growth and the arrival of the ECB on the tightening side, the biggest strain on the dollar these days is Donald Trump.
The US President has had quite a negative effect on the dollar since he took office. Its inability to carry out reforms and the political uncertainty, both at the international and national levels, generated by its management style have made investors doubtful its presidency will support the US economy and, by extension, the greenback.
The July jobs report will be the main attraction of the day. Non-farm payrolls are expected to increase 180,000 in July, down from 222,000 in the previous month. Economists surveyed anticipate the unemployment rate to have edged down from 4.4% to 4.3%. Finally, wage growth is expected to have slowdown, with average hourly earnings growing 2.4%y/y versus 2.5% a month ago. However, on a month-over-month basis, wages should have grew 0.3% compared to 0.2% in July.
Overall, investors seem to have become less sensitive to news from the job market. Therefore, there is little chance it’ll move the substantially the US dollar today. However, given the overall negative dollar environment, disappointing data will likely affect more the USD than good ones.
Status quo for the Bank of England
That was not a surprise yesterday, the BoE held rates unchanged at 0.25% and the asset purchase target will be kept at £435 billion. 10 billion of corporate bonds will also be purchased but this does not change from what was previously decided.
However, the British central bank slashed its growth forecasts expectations to 1.7% for this year from 1.9%. Policymakers underlined concerns about consumer spending growth which is too slow to drive growth higher. On top of that, Brexit negotiations outcome remain uncertain and the investment levels should likely diminish on those fears.
We still consider that the Brexit vote has had, for the time being a good consequence by lowering the pound value which is why we should see inflation heading towards, probably in October. It is definitely clear that it is clear that the sterling decline accounts for the growing inflation. By the way, forecasts for 2018 have been raised to 2.5% from 2.4%. After 2019, inflation forecasts are expected to hold higher than the BoE target. This should likely trigger at some point a rate hikes – Two are saying BoE policymakers. We remain bullish on the pound as in our view, markets are still overestimating the Brexit effect.