ISM

Like it or hate it, there is clearly demand for the USD index around 100. And should NFP and ISMs outperform against next week, it might spark a dollar rebound.

The Institute for Supply Management (ISM) Non-Manufacturing survey unexpectedly slipped below 50 for the second time in 2024, with the index falling to 48.8 in June from 53.8 the month prior.

It has been another volatile week for traders thanks to weaker US economic data, a dovish Fed and a refreshingly hawkish Bank of Japan. ISM services is a key event from the US next week, but apart from that it is mainly second-tier data from the APAC region. And that means appetite for risk might be the main driver for markets next week. But given the larger moves already seen, we may need to lower out expectations for volatility unless a fresh catalyst arrives.

A softer-than-expected ISM services report was the gift that Fed doves have been waiting for ahead of tomorrow's NFP report. The USD index is now on track for a 3-week reversal pattern below resistance, and AUD/USD has broken out in style.

It's possible we'll know who won the first round of France's election by the time markets open in Asia next week, which means the euro and European index futures could be more active than usual. Traders should then look to the pound and FTSE for pre-election jitters, although once again it could be Asian markets that get to witness the results. Despite the public holiday on Thursday, the US economic calendar is also packed. Two key ISM reports for manufacturing and services land before July 4th, alongside JOLTS and ADP employment reports, which are the warm-up acts for NFP on Friday.

EUR/USD is on track for its smallest weekly range since September 2021, although 1-week implied volatility levels that we could see more action next week.

Last week we noted that bond yields could trump economic data this week, and for the most part they did. We can also extend that comment into next week, especially if they continue to retreat and loosen their grip on bearish sentiment and allow risk assets to rebound. Highlights in next week’s calendar include the NFP and ISM PMI reports, RBA and RBNZ monetary policy meetings, the quarterly Tankan survey for Japan and Canada’s employment report.

The Bank of Canada (BOC) are expected to hold rates at today’s meeting, given GDP unexpectedly contracted in Q2. Still, implied volatility has spiked higher for USD/CAD. Perhaps the BOC pause will not be as dovish as expected, Fed members tout a hold or the rise of bond yields (and therefore the US dollar) lose steam. If so, USD/CAD may be better for short bets beneath the April highs.

Because the inflation component of ISM was higher than December's reading, the Fed will have to search for lower inflation elsewhere.