Consolidation Ahead of US Jobs Data

USD: Quiet holiday trading unlikely to change ahead of NFP

During the 4th of July US vacation, the major currencies compared to the US dollar demonstrated a relatively predictable pattern of narrow trading ranges. Among the G10 currencies, the NZD performed the best. This could be attributed to the liquidation of long AUD/NZD positions, which were established based on the expectation of diverging central bank policies pushing the pair higher. I maintain a long AUD/NZD trade idea, although it has experienced further decline following the Reserve Bank of Australia's decision to keep the policy rate unchanged. Nevertheless, I anticipate potential support for the AUD going forward. The RBA's guidance remains unchanged and hints at the possibility of a future rate hike. I believe the economic consequences of rate hikes by the Reserve Bank of New Zealand RBNZ will soon become more evident, ultimately resulting in renewed outperformance of the AUD compared to the NZD.

Looking ahead, aside from the release of the FOMC minutes this morning, there are minimal potential market-moving events prior to the key US jobs report on Friday. The FOMC minutes covered the meeting held on June 13th/14th, during which the FOMC presented individual forecasts indicating a median expectation of two more rate increases this year. Consequently, the market is well-prepared for further hawkish statements summarizing the FOMC meeting. As always, the context and tone of the minutes was crucial. The market will closely analyze whether the details align with the hawkish outlook presented by the rate forecasts. Any indications that question the hawkish message conveyed in the forecasts could trigger a market response. However, given that only two FOMC members expressed reservations about further rate increases, it appears unlikely that the minutes will deviate from the recent hawkish sentiment.

One noteworthy aspect of Federal Reserve Chair Jerome Powell's commentary since the last FOMC meeting relates to the pace of tightening. Powell indicated in his semi-annual testimony to Congress that the speed of tightening is no longer of utmost importance, considering the already implemented rate hikes. If there are additional comments reinforcing this notion, it may fuel speculation that the FOMC could pause in July as well. However, the impact of the FOMC minutes on the market was overshadowed by the reaction to the jobs data on Friday, as market movement is expected to be limited until then.

Currently, the market has priced in a 20 basis points increase for the July 26th hike, a level that has remained consistent throughout most of the past month. The NFP and CPI data will remain crucial factors. I anticipate that the EUR/USD pair will also trade within a relatively narrow range, with the final estimates for PMI in Europe today unlikely to have a substantial impact on the market. However, it will be notable to observe the Euro-zone's year-on-year Producer Price Index (PPI) data for May from yesterday, as a decline into deflationary territory would signify a reversal from the previous positive YoY rate observed since January 2021. The speed at which the YoY PPI transitions back to negative territory will be an interesting development, taking only nine months compared to the 20-month advance to reach its peak of 43.4% in August 2022.

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