Week Ahead: NFP Beats Ahead of US CPI and BOC
Fawad Razaqzada July 5, 2019 3:42 PM
Next week, traders will be making a more sober assessment of the latest US jobs report, after the mixed-to-good readings triggered a rally for the dollar while gold and equities sold off. There will be plenty of macro data, including US CPI, and a rate decision from the Bank of Canada to keep traders busy, ahead the ECB and FOMC meetings towards the end of the month.
NFP beat reduces odds of 50 basis point cut
The just-released US payrolls report for June was a good one, even if wages disappointed slightly. The dollar extended its rebound, while gold and equities sold off. The probability of a 50-basis point cut was slashed to just 2.8%, while that of a 25-basis point cut simultaneously rose to 97.2%. Consequently, traders are still fully expecting a rate cut at the end of the month, but they are now almost certain it won’t be a 0.5% trim. That helps explain the markets’ reaction.
But there are still some doubts among market commentators about a July cut. They will be wondering now whether the rebound in employment growth has reduced the need for a rate cut in July, especially in light of trade talks between the US and China resuming. We think not, but a lot now depends on next week’s consumer price inflation data and the ECB meeting later on in the month. If the latter choose to cut rates unexpectedly on July 25, then the Fed could follow suit, regardless of any further improvement in US data in the interim.
Here is everything FX traders need to watch next week:
The latest German trade and industrial production figures for the month of May will be published on Monday. Industrial production suffered a sizeable 1.9% drop in April and has missed expectations in 8 out of the past 11 months. With the latest Eurozone manufacturing PMIs remaining weak amid trade, Brexit and economic concerns, we don’t anticipate a speedy recovery in German industrial output.
We will also have more forward-looking data from the Eurozone on Monday, namely Sentix Investor Confidence – a survey of about 2,800 investors and analysts in which respondents are asked to rate the relative 6-month economic outlook for the Eurozone. The index peaked at 34.0 at the end of 2017 and since then it has declined sharply throughout 2018, before falling below zero in 2019 – pointing to increasing pessimism. Although it has posted a few better-than-expected readings here and there, the index has remained below zero in 5 out of the past 6 months so far this year, with the latest reading being -3.3, suggesting investors are still pessimistic about Eurozone growth. Any further deterioration could see the single currency and EUR/USD come under further pressure following Friday’s slump.
Tuesday is void of any major market-moving data, but there will be a few Federal Reserve speakers who could spark some volatility in the dollar. We will hear from Chairman Jerome Powell and FOMC members James Bullard and Randal Quarles. This could be the first time we will hear some feedback from the Fed in reaction to the latest jobs and wages data, which, as mentioned, beat on the headline but missed on the wages front.
Wednesday will be a busy day in terms of scheduled macro events. From the UK, we will have the monthly GDP, construction output and manufacturing production figures. All of these fell noticeably last time and judging by the latest PMI data, we are not expecting a sharp rebound. Another poor set of figures could increase the pressure on the pound even further, although the weaker sterling could see the FTSE continue to outperform her European peers. Need we mention what is causing all this weakness? Yes, it is that dreaded B-word.
As well as the UK, we will also have industrial production data from France and Italy, the Eurozone’s second and third largest economies. Thus, the EUR/GBP could be in for a bit of volatility on Wednesday morning.
In the afternoon, the focus shifts to North America. First up, it will be the Bank of Canada which will be making a decision on interest rates. After a series of hikes, the BOC has left its main interest rate unchanged at 1.75% for the past 6 meetings and analysts expect the inaction to continue for the seventh month on Wednesday.
The Loonie has been far and away the strongest major currency year-to-date. After a dip in the first two months of the year, Canada’s Ivey PMI has recovered sharply back to the mid-50s, indicating solid economic growth while the rest of the world slows down. Another fundamental factor driving the Canadian dollar higher this year is the sharp rebound in oil prices as OPEC attempted to tighten the market. But the most important factor behind CAD’s strength, is the BOC itself. After hiking rates five times through 2017 and 2018, the central bank has now shifted to a neutral posture. While not a bullish catalyst in itself, in the current environment, “neutral is the new hawkish” when it comes to central bank policy. The BOC could still cut interest rates in Q4 of this year or Q1 2020 but compared to other major central banks such as the Fed or ECB, the BOC’s interest rate outlook is still relatively compelling.
Later in day on Wednesday, we will have the FOMC meeting minutes and more Fedspeak – this time from Silvana Tenreyro and again James Bullard. So, it could be an interesting afternoon for the USD/CAD pair in particular.
The big data for Thursday will be US Consumer Price Index (CPI) for the month of June, make no mistake about it. Inflation has remained weak over the past years, which has increased the calls for a rate cut as trade tensions chipped away at sentiment. With Friday’s wages data pointing to subdued wage growth, inflationary pressures are low. But there could be a surprise in the CPI that could catch a few people off guard.
On the last day of the week, we will have Chinese trade figures first thing. They should reveal the extent of the damage US tariffs have inflected on the Chinese business. In the Eurozone, Friday’s key data release will be industrial production. With the Eurozone PMIs pointing to subdued economic activity in manufacturing, unfortunately we can’t see the light at the end of the tunnel. And from North America, there are only a couple of second-tier US macro pointers, including producer prices index, to look forward to on Friday.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.