A big week for US employment, Fed pricing and USD: The Week Ahead

With the US on a public holiday on Monday we could be in for a quiet start to the week. But there is plenty of economic data lined up as we veer towards Friday’s nonfarm payrolls report. Traders are now placing a greater emphasis on jobs data in general to help decipher whether we really will get multiple Fed cuts alongside a soft landing, to protect their precious appetite for risk. Which means job cuts, job openings, ADP employment and jobless claims data will be the warmup act for the headline payrolls figures.

But we also have ISM manufacturing and services report which provide a lead on growth, employment and inflationary trends for the world’s largest economy. Final PMI data for major regions will be worth a look, although they’re not likely to be a huge market driver unless we see large deviations from the flash prints.

Traders will also get to find out if the BOC cut rates for a (third) consecutive meeting, which could feed back into ‘dovish fed’ frenzy if they do.

USD index technical analysis:

The fundamental backdrop and technical picture both point lower for the USD in the coming months. The notable declines in 2018 and 2021 fell around -15%, which could take the USD index down to !96 if repeated. But that does not mean it will happen in a straight line.

We have already seen two notable bearish months for the USD index, having fallen around 5% from the May highs. Which has generally been the depth of drops over the past 18 months. SO perhaps some mean reversion is due. Especially since the world and their dog  now seem to be bearish the USD dollar.

The daily chart shows momentum is turning higher after support was found around 100.5. The 2024 open, weekly VPOC and 10 handle are also nearby to reinforce support. Should US data not soften as fast as doves would like next week, we could see the USD bounce continue and head for 102 as a minimum.

However, the daily trend remains bearish below 103.55. And bears may simply be looking to reload around resistance levels such as 102, 61.8% Fibonacci level for the high-volume node (HVN_ around 103.

The Week Ahead: Calendar

The Week Ahead: Key themes and events

• US employment data (NFP, ADP, jobless claims)
• ISM manufacturing, services
• BOC interest rate decision

US employment data

Jerome Powell opened the door for multiple rate cuts at Jackson Hole last week when he said that inflation had declined “significantly”, and that “the labour market is no longer overheated”. With a September cut effectively confirmed, the pace of cuts will be down to incoming data. And that makes incoming employment data the more important.

Should employment data next week continue to soften, it should strengthen the case for back-to-back cuts that markets are so keen to price in. But as I have been warning this week, it might not take too much of an upside surprise with incoming data to shake bears out of an arguably oversold US dollar bet.

Traders should therefore keep a close eye on next week’s employment figures, the biggest of which is nonfarm payrolls on Friday. The ideal scenario for USD bears is to see a notable drop of the headline NFP figure alongside average hourly earnings and rising unemployment.

But we also have job openings, cuts, ADP employment, claims data and ISM PMIs (which include an employment component) in the lead up to Friday’s NFP report.

Trader’s watchlist: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones, VIX, bonds

ISM manufacturing, services

The ISM reports are a very useful tool for investors, as they provide three separate views to the asses the underlying strength of the US economy: growth prospects, inflationary pressures, employment trends. The ISM services report will carry more weight than the manufacturing one, particularly if the headline numbers expands at a much slower pace (soft landing), or contracts below 50 to warn of a recession (hard landing).

These reports will also shape sentiment heading into Friday’s NFP report. For example, if the headline ISM, new orders and employment were lower – it likely points to a weaker NFP report.

Trader’s watchlist: EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, Dow Jones, VIX, bonds

BOC interest rate decision

The BOC have cut rates by 25bp at their previous two meetings, and economists and market pricing strongly favour a third to arrive next week. This will take the cash rate down to 4.25%, below the RBA’s 4.35% and put them on par with the ECB. Only the SNB’s 1.25% ands BOJ’s 0.5% rates are lower among the major central banks.

A Reuters poll also estimates that the BOC could cut their cash rate 3.75% by December, which leaves room for two more cuts at their final two meetings of the year. Which could complete five back-to-back cuts totalling -125bp.

This leaves very little in the room for a dovish surprise from the BOC. SO, if there are to be a surprise at all, it would be a less-dovish-than-expected tone. That could further strengthen CAD.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge