US Employment report, RBA and BoE in the forefront

With worries for a possible levelling-off of the recovery of the US economy due to the high COVID 19 infection rate being present, we are about to enter the new week. Please note that indicative of the market worries was the rise of gold’s price which reached a record high today by breaking the $1980 level and taking another aim at the $2000 psychological barrier. Also, the further deterioration of the US-Sino relationships, the intense market worries for the recovery of the US economy especially after the Fed’s meeting and the intense negotiations in the US Congress about the new US fiscal stimulus made headlines moving the markets. In the coming week we expect a number of financial releases, yet the main one may prove to be the US employment report for July with its NFP figure. At the same time, one should not underestimate the possible market moving effect of RBA’s and BoE’s interest rate decisions due out next week.

USD – US employment report eyed

The USD is about to end the week with another substantial loss, as characteristically the USD Index has reached a two-year low, after five weeks of consecutive losses. USD fundamentals tended to revolve around the COVID 19 infections in the US and the pace of the economic rebound of the US. It was characteristic how the Fed in its interest rate decision linked directly the recovery of the US economy to the path of the pandemic. Fed Chair Powell, stated that the economic downturn is severe and may take continued fiscal and monetary support to recover, sending also a signal to US lawmakers. The situation in the US Congress remains dire as US lawmakers do not seem able to agree on the size of the next fiscal stimulus package. The Republicans unveiled on Monday a plan for a fiscal stimulus around $1 trillion, which seems like a far cry from the Democrat’s $3 trillion plan. It should be noted that the federal unemployment benefit of $600, expires today, making the situation even more urgent. We expect that ultimately the two sides will strike a deal and such headlines could create substantial support for the USD. At the same time also the worries for the US economic recovery intensified as the advanced US GDP growth rate for Q2, released on Thursday, showed a tremendous contraction of -32.9% qoq (Annualised) for the US economy, while the initial jobless claims figure rose slightly, implying that the recovery of the US employment market has hit a halt. Next week is to provide a clearer picture as the US employment report is to be released. Forecasts tend to be not so rosy as these lines are written which may be foreshadowing difficult days ahead for the USD. Yet before the release of the US Employment report for July, the markets are to receive the new weekly initial jobless claims figure on Thursday as well as the ADP national employment figure on Wednesday. Also, we would like to highlight the ISM manufacturing PMI for July on Monday, the factory orders growth rate for June on Tuesday and the ISM non-manufacturing PMI for July on Wednesday as indicators of economic activity.

GBP – BoE’s interest rate decision under the magnifying glass

The pound strengthened against the USD, JPY and the common currency since Monday in an impressive run. UK fundamentals seem to continue to be about the course of the pandemic in the UK, as characteristically some areas of the UK, are to be under renewed partial lockdown. At the same time the developments at the Brexit negotiations are not to be underestimated as the clock is ticking and the matter becomes more urgent. It should be noted that until now the UK seems to have difficulties reaching new trading arrangements with other countries as it is about to leave the EU trading status and the chilling of the UK-Sino relationships doesn’t help either. On the monetary front BoE’s interest rate decision on Thursday, stands out among releases next week. The bank is widely expected to remain on hold at 0.10% and currently GBP OIS imply a probability of 97.23% for such a scenario. The UK economy suffered a substantial blow in spring, and economists expect it to require substantial time to recover and return to its prior size. We would not be surprised to see BoE refraining from past statements that the economy could recover by the second half of 2021 and warning for a longer recovery period. It was characteristic how BoE member Tenreyro warned of an “incomplete V” after an initial boost. However, it should be noted that initial signs seem to be rather promising given the release of the PMIs and the retails sales growth rate. Also, we would not be surprised to see the bank delaying the announced £100 billion stimulus package for a later date. Another issue which analysts will be focusing on, would be the possibility for the bank to employ negative interest rates, a scenario not refuted in the past by BoE officials. Overall, we tend to see risks related to the event as tilted to the bearish side for the pound. As for financial releases we highlight the release of the final PMIs for July, especially the Service sector indicator on Wednesday, as well as the Halifax house prices for July on Thursday.

CAD – Oil and data in focus

Worries continue to surround the CAD, especially given the recent slight drop of oil prices. It’s characteristic of the market’s view for the Loonie, that the currency practically relented any gains made against the USD within the week, rendering the CAD as an underperformer if compared to other major currencies. The situation in Canada seems to be improving as after four months of lockdown, Toronto is expected to move into the third stage of its economic reopening today, as the local government announced. On the flip side the situation with the economy of Canada’s southern neighbour tends to create worries as a substantial amount of Canadian exports is directed to the US. In the coming week we tend to focus, besides the oil market also on financial releases, especially after the better than expected improvement of Canada’s GDP growth rate for May. Further clues are to be delivered for the level of economic activity in the Canadian economy as the Markit Mfg PMI for July is due out on Tuesday and the Ivey PMI for July is to be released on Friday. On Friday, traders are also to receive Canada’s employment data for July, while on Wednesday, we get Canada’s trade data for June.

EUR – Financial releases to set the tone

The common currency strengthened substantially in the past few days against the USD, the CHF and JPY, while retreated against the pound. It should be noted that the recent releases for Eurozone’s GDP rates for Q2, tended to weigh on the common currency as the area’s economy conracted more than expected, reaching as low as -15.0% yoy. At the same time we also got Eurozone’s HICP rate for July which accelerated instead of retreating as expected, generating some hopes. ECB president Christine Lagarde’s statements intensyfied worries somewhat, as she stated that the ECB has to maintain the “safety net” of its massive bond purchases at least until June 2021 to help underpin the economy. Also the ECB president stated that Eurozone’s economic recovery from the crisis, is to be “restrained” as households save instead of spending while some airlines and hotels suffer “irremediable” damage. We tend to agree with the statement, hence we also intend to keep an eye out for the area’s retail sales growth rate for June on Wednesday. On Thursday and Friday we get Germanys’ industrial orders and industrial output growth rates for June respectively. Also Germany’s trade data for June are going to be of interest on Friday, while the final readings of July’s PMIs are due out on Monday, Tuesday and Wednesday.

AUD – RBA’s interest rate decision along with data releases eyed

The Aussie seems about to maintain its six-week winning streak against the USD, albeit the gains seem to be rather capped, given the strong weakness of the USD. Starting with RBA’s interest rate decision, the wide retreat of the CPI rate for Q2 and the rise of the unemployment rate for June are pushing the bank for further action. The bank is widely expected to remain on hold at +0.25% and currently AUD OIS imply a probability of 98.72% for such a scenario. We expect the bank to sound more dovish, given the recent adverse financial releases mentioned before, which could have a bearish effect on the AUD. It should be mentioned that RBA Assistant Governor Chris Kent stated that negative rates were not an option for the bank, while RBA seems prepared to scale up operations should it be needed. A recent government bond issue drew substantial overseas interest, which displayed some confidence in the Australian economy and its triple A rating. As for financial releases, we highlight Australia’s retail sales growth rate and trade balance for June, on Tuesday, just before RBA’s interest rate decision, while on Friday, we get China’s trade data for July.

General Comment

As a general comment, we expect the USD to maintain the initiative over other currencies, albeit regional issues may affect specific currencies as well. We tend to focus on any signs of slowdown of economic activity in the US economy which could weaken the greenback further. At the same time, we also expect the developments surrounding the new fiscal stimulus package to be of the essence for the USD’s direction. Any headlines indicating that the Republicans and the Democrats are nearing a deal about the package could create substantial support for the USD and vice versa. Also, we do not underestimate the importance of any further developments in the US-Sino relationships for USD’s direction. Overall, we expect that the next week is to be intense providing the FX market probably a bumpy ride.

Disclaimer:

This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.

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