Dollar trades sideways ahead of NFP

ECB cuts rates but the outlook remains unclear

The ECB confirmed the overwhelming expectations and announced a 25bps rate cut on Thursday. President Lagarde tried to explain the reasoning behind the nearly unanimous decision, but her justification was somewhat questionable considering the fact that the inflation projections were revised higher for both 2024 and 2025, and the inflation rate is expected to reach the 2% target three months later than seen in March. 

With the ECB making its move for the first time ahead of the Fed, no one expected a normal cycle. Therefore, it came as no surprise that, compared to the previous easing cycles, the ECB will need to see more consistent data confirming the disinflation process in order to cut rates again.

Hence, another rate move at the July gathering is most likely out of the picture as the ECB won’t have enough new data in 45 days to justify such an announcement. This makes September the next “live” gathering and, more importantly, it buys the ECB valuable time as it waits for the Fed to finally turn dovish.

All in all, ECB members have some explaining to do over the next few weeks, especially if data continues to improve. Interestingly, President Lagarde and ECB members Holzmann and Centeno will be on the wires today.

In the meantime, the euro had an unexciting day as the telegraphed rate cut was not accompanied by dovish rhetoric. Euro/dollar continues to hover at a 3-month high and the pound/euro pair is still testing a strong support area, which has acted as a floor since June 2023.

US labour market data is next 

With the ECB meeting in the rear-view mirror, the focus today is on the US labour market report. At 12.30 GMT the market will find out if the importance of next week’s Fed meeting rises significantly.

Forecasts point to a 185k increase in non-farm payrolls in May with both the unemployment rate and the average earnings growth seen stable at 3.9% yoy. The latter is getting lots of market attention as a pause in the ongoing moderation in average earnings growth could be seen as a clear signal that consumer spending could remain potent. 

Markets are craving weaker data, and the combination of Wednesday’s weaker ADP report and yesterday’s uptick in jobless claims is opening the door to a downside surprise. The Fed is not expected to cut on Wednesday, but a very weak set of figures today could act as the catalyst for a dovish turn in Chairman Powell’s rhetoric next week.

Stronger US data to confuse the market

On the flip side, the stock markets could go into a tailspin if there is a significant upside surprise today. For example, a 250k+ print in the non-farm payroll figures could push the S&P 500 index decisively lower and help the 10-year US Treasury yield flirt with the 4.5% level again. The Fed does not like acute market reactions and remains fearful of a repeat of the March 2023 bank failures.