Dollar Under Pressure Ahead of NFP Data; Sterling Strengthens with Labour Victory

Dollar’s broad-based decline continues in Asian session today as market attention shifts to the highly anticipated US Non-Farm Payroll data. Traders are eager to see a weak report on job and wage growth to reinforce the expectation that the Fed will initiate a rate cut in September. If these expectations are met, we could see a boost in risk sentiment, particularly with S&P 500 and NASDAQ extending their record highs. This risk-on sentiment could subsequently weaken Dollar further.

Sterling is holding strong following a decisive victory for the UK Labour Party in the general elections, securing a substantial majority. As of now, with many results yet to be announced from Thursday’s vote, Labour has already won more than 326 of the 650 seats in parliament, with exit polls suggesting it could capture around 410 seats. Conversely, the Conservative Party faces its worst result in history, securing only 136 MPs.

On the politics front, focus would then shifts to France, where the parliamentary election run-off is scheduled for Sunday. Recent polls suggest that the far-right National Rally party is poised to win more seats than any other party, but will likely fall short of the 289-seat threshold required for an absolute majority. The strategy of the “republican front,” where candidates from various political parties withdraw to support those best positioned to defeat the National Rally, seems to be effective.

For the week, Sterling, Euro, and Aussie are tied as the top performers, while Dollar is now the weakest, followed by Swiss Franc and Yen. Loonie and Kiwi remain in the middle positions.

Technically, USD/CAD is a key pair to watch with employment data from both the US and Canada on the horizon. The current trend suggests that the decline from 1.3845 is likely to continue through the 1.3589 support level. Break below this level would target the 100% projection of 1.3845 to 1.3589 from 1.3790 at 1.3534. If this decline is merely a correction, strong support should emerge around 1.3534, leading to a notable rebound.

In Asia, at the time of writing, Nikkei is down -0.15%. Hong Kong HSI is down -1.00%. China Shanghai SSE is down -0.99%. Singapore Strait Times is down -0.73%. Japan 10-year JGB yield is down -0.0040 at 1.079.

US NFP to shape Fed’s Sep rate cut odds

Markets focuses are on US Non-Farm Payroll report, a critical data release that could significantly influence market sentiment and monetary policy expectations. Dollar has been under selling pressure this week, driven by a series of disappointing economic data, particularly from ISM services. These developments have heightened expectations that Fed will begin cutting interest rates in September. Current fed funds futures suggest a nearly 73% probability of this outcome.

For June, markets are anticipating a headline job growth figure of 180k. Unemployment rate is expected to remain steady at 4.0%, while average hourly earnings are projected to increase by 0.3% mom. Recent economic indicators have painted a mixed picture: ISM Services Employment declined to 46.1 from 47.1, and ISM Manufacturing Employment fell to 49.3 from 51.1. ADP Employment report showed an addition of 150k net new jobs, and 4-week moving average of initial unemployment claims rose to 239,000, up from 222,000 last month, marking the highest level in ten months.

US stock markets have been responding to weak economic data with a “bad news is good news” attitude recently, where disappointing data increases the likelihood of an earlier rate cut by Fed. This sentiment is expected to persist with today’s NFP report. Market reactions could be pronounced, especially if unemployment rate rises or earnings growth falls short of expectations.

S&P 500 has been on a record-breaking run, and weaker-than-expected NFP report could further extend this rally. Current up trend is in progress for 61.8% projection of 4103.78 to 5263.95 from 4953.56 at 5670.55. Nevertheless, break of 5446.53 support will bring consolidations first, before extending the up trend at a later stage.

ECB’s Lagarde: Vigilance needed as inflation fight continues

ECB President Christine Lagarde emphasized the importance of remaining vigilant in the fight against inflation in an interview with Portuguese TV RTP overnight. She underscored the necessity of being confident that inflation is on a continuous downward trend, supported by data on wages, profits, and economic activity.

“We have to remain vigilant and we have to be confident that inflation is continuously down and that the data that we receive on wages, on profit, on activity, reinforce our confidence that we are on a path to win the fight,” Lagarde stated.

Lagarde highlighted the importance of comprehensive data to guide monetary policy decisions, noting, “We need a lot of data — I’m not sure that we are getting those data at every single monetary-policy Governing Council meeting that we have.” She acknowledged that, in theory, policy adjustments could be made at any meeting, but emphasized that such decisions would require a robust set of data.

Looking ahead

Germany industrial production, France industrial production and trade balance, Swiss foreign currency reserves and SECO consumer climate, and Eurozone retail sales will be released in European session. Later in the day, US non-farm payrolls will take center stage while Canada will also publish job data and Ivey PMI.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.2744; (P) 1.2756; (R1) 1.2772; More…

GBP/USD’s rebound from 1.2612 is still in progress and intraday bias stays on the upside. Correction from 1.2859 should completed at 1.2612. Firm break of 1.2859 will resume rally from 1.2298. On the downside, though, below 1.2705 will dampen the immediate bullish case, and turn intraday bias neutral again first.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern that is still in progress. Break of 1.2445 support will confirm that another falling leg has started and target 1.2036 cluster support again (38.2% retracement of 1.0351 (2022 low) to 1.3141 at 1.2075. Nevertheless, break of 1.2892 resistance will argue that larger up trend from 1.0351 is ready to resume through 1.3141.

Economic Indicators Update