US Dollar revival depends on strong wage growth figures
US dollar may have surely recovered this week against most majors, but on a larger scheme of things the greenback is still on a weak footing; courtesy of sharp drop in Fed rate hike bets following dovish March FOMC rate decision.
Policymakers at the Fed continue to call for a possibility of two rate hikes this year. However, markets see just one rate hike by year end. Fed speak this week suggests policymakers are trying to push up June rate hike bets. But again, markets see a little possibility since June Fed is just a day or two ahead of Brexit referendum (scheduled on June 23).
Still, a significant minority expects Fed to move in June or even September if wage price inflation spikes. Hence, focus is likely to be on the wage growth numbers and not just payrolls figure.
Furthermore, labor market strength is a well known fact and has remained resilient in the first quarter as well. So a strong NFP figure would not be a surprise and thus won’t be enough to trigger a revival in the US dollar.
Scenarios
Note – Downward revisions to previous NFP/wage growth is likely to take some shine away from the first scenario. But also take note that first quarter is usually the weakest in the US and thus downward revisions to Q1 figures wouldn’t be able do much damage to US dollar.
Scenario – 1 – EUR/USD sell off could gain pace
Scenario -2 – watch out for EUR/commodity $, GBP/commodity $ pairs amid generalized dollar weakness
Broad based USD weakness with a sharp drop in USD/JPY and rise in EUR, GBP are expected. Commodity dollars are likely to strengthen against USD as well. However, note that commodity dollars may underperform today and next week compared to EUR, GBP, JPY, thus making the crosses look more attractive in this scenario.
USD/JPY could resume its journey back to 105.55 levels in case of weak US data. Moreover, there is little BOJ could do as of now, hence only a strong US data/hawkish Fed could pull up the pair.
British Pound could gain traction as well, although weak UK PMI data released this week might make Cable a risky bet. Assuming commodity price weakness remain intact, GBP/AUD appears attractive under second scenario. On similar lines, EUR/CAD looks good on charts as well.
Policymakers at the Fed continue to call for a possibility of two rate hikes this year. However, markets see just one rate hike by year end. Fed speak this week suggests policymakers are trying to push up June rate hike bets. But again, markets see a little possibility since June Fed is just a day or two ahead of Brexit referendum (scheduled on June 23).
Still, a significant minority expects Fed to move in June or even September if wage price inflation spikes. Hence, focus is likely to be on the wage growth numbers and not just payrolls figure.
Furthermore, labor market strength is a well known fact and has remained resilient in the first quarter as well. So a strong NFP figure would not be a surprise and thus won’t be enough to trigger a revival in the US dollar.
Scenarios
- Under current market environment, a strong revival in the US dollar would require strong wage growth figure + strong NFP + steady/drop in unemployment rate (without downward revisions to prior month).
- On the other hand, a combination of strong NFP but weak wage growth figures may do little to help US dollar extend gains and could actually see greenback shed this week’s gains against majors.
Note – Downward revisions to previous NFP/wage growth is likely to take some shine away from the first scenario. But also take note that first quarter is usually the weakest in the US and thus downward revisions to Q1 figures wouldn’t be able do much damage to US dollar.
Scenario – 1 – EUR/USD sell off could gain pace
- Pair’s failure to sustain above 1.1534 followed by a break below strong support at 1.1429 despite having jumped to 1.16 levels earlier this week makes it more vulnerable to a strong US data as discussed under first scenario.
- Immediate support at 1.1327 (smaller rising trend line on daily chart) could be breached and prices may drop to 1.1236 (38.2% of 1.0463-1.1714).
Scenario -2 – watch out for EUR/commodity $, GBP/commodity $ pairs amid generalized dollar weakness
Broad based USD weakness with a sharp drop in USD/JPY and rise in EUR, GBP are expected. Commodity dollars are likely to strengthen against USD as well. However, note that commodity dollars may underperform today and next week compared to EUR, GBP, JPY, thus making the crosses look more attractive in this scenario.
USD/JPY could resume its journey back to 105.55 levels in case of weak US data. Moreover, there is little BOJ could do as of now, hence only a strong US data/hawkish Fed could pull up the pair.
British Pound could gain traction as well, although weak UK PMI data released this week might make Cable a risky bet. Assuming commodity price weakness remain intact, GBP/AUD appears attractive under second scenario. On similar lines, EUR/CAD looks good on charts as well.
