Forex Friday

While the energy shock is a major heading for the euro, the single currency remains supported by a hawkish European Central Bank while growth data in the Eurozone has also been surprisingly resilient. Meanwhile, the dollar faces some near-term positioning risks as markets look ahead to the US midterm elections and given the renewed weakness in technology stocks.

The EUR/USD has tagged a fresh year-to-date low as French public-finance concerns trigger a government bond sell-off. Today's US jobs report may change little, with resilient activity, elevated energy prices and hawkish Fed bets keeping the greenback supported. With the pair trapped below resistance at 1.1410, the risk to the near-term EUR/USD forecast is tilted to the downside.

Heading into the week ahead, the macro calendar is quieter. But for as long oil remains supported, the US dollar forecast will remain bullish. Not only will oil prices be important for determining the direction for the dollar and USD/JPY, but bond yields too, and by extension, risk appetite.

The EUR/USD edged lower this morning, down for the second day, ahead of the release of US CPI. The pair has been consolidating in a tight range, and yesterday’s hawkish rate hike from the ECB failed to deliver the breakout many traders were hoping to get. With the US dollar finding renewed support in recent days, the risk to the near-term EUR/USD forecast is tilted to the downside.

The NFP arrives today with the odds of a rate hike from the Fed slipping back to around 50% and correspondingly the dollar sold off again yesterday. That was due to comments from Fed’s Waller who said next week’s CPI could determine whether he votes for a hike or hold. He was thus a lot less hawkish than the Fed Chair Kevin Warsh.

For much of this week, the EUR/USD has been edging lower with the US dollar regaining some ground after last week’s sell-off that was triggered, in part, by the bond market worries. Investors have been unwilling to bet further against the US dollar so far this week ahead of Kevin Warsh’s keynote speech at the Jackson Hole summit, due later today.

This week’s main theme has been a drive away from the dollar and into currencies of economies with better fiscal discipline and lower debt levels. The short-lived rally in US long-dated bonds fuelled rallies in gold and silver prices, which, along with the like of Swiss franc, benefitted further from increased haven flows.

Today’s US jobs report was the first of the four major releases before the Fed’s next meeting in September. As it turned out, this was a pretty bad report and as a result, the odds of a September rate hike fell to around 44% from north of 55% before the data was released.

Although this week’s softer US inflation readings briefly encouraged hopes that the Fed may not have to tightening after all, the renewed rise in oil prices has complicated that narrative and prompted investors to reassess the outlook. As such, they have found it difficult to justify shorting higher-yielding currencies or buying low or zero yielding assets. This narrative is unlikely to change much until there is genuine breakthrough in the tension between the US and Iran.

With US financial markets closed for the Independence Day holiday, trading conditions will be considerably thinner today. Reduced liquidity often exaggerates price swings and creates favourable conditions for official intervention in the foreign exchange market…

Earlier today, the US dollar found renewed support after oil prices rebounded on fresh doubts over a US-Iran deal, while equity markets held steady amid the SpaceX IPO enthusiasm. But moments ago, Iran’s foreign minister delivered hope, with a social media post suggesting that the Memorandum of Understanding “has never been closer.”

The US jobs report is due shortly, before attention turns to US CPI and ECB rate decision next week for the EUR/USD traders. Of course, the bigger issue is oil prices and the Strait of Hormuz. Despite persistent uncertainty surrounding US-Iran negotiations, oil markets have remained remarkably composed, unable yet to generate the upside momentum many would normally expect. That restraint in energy prices is proving important for currency markets, limiting the US dollar’s ability to stage a more convincing rally despite an increasingly supportive domestic backdrop. Will a stronger-than-expected US non-farm payrolls report later today provide another boost to the dollar?