Dollar Recovers Awaiting US Private Payrolls

Employment data to guide USD this week

The Dollar is higher across the board versus the majors ahead of the start of American jobs reports this week. The ADP private payrolls will be the first of three employment data points with the weekly unemployment claims and the U.S. non farm payrolls (NFP) having a lot of say in where the USD is headed. The headline number of jobs gained is important but the market will be even more focused on evidence of higher inflation. The U.S. Federal Reserve has already hiked interest rates two times in 2017, but could reduce the pace of monetary policy tightening if there is no proof of higher wages as part of this week’s reports.

The ADP Non-Farm Employment Change survey will be published on Wednesday, August 2 at 8:15 am EDT. US corporations are expected to have created 187,000 jobs and the release will create a baseline for the NFP report to be published on Friday. Economic indicators in the US have been mixed, political uncertainty in Washington and some hints of a more cautious U.S. Federal Reserve have put the dollar under pressure.

The Energy Information Administration (EIA) will publish the weekly US crude inventories at 10:30 am EDT. Oil stocks are forecasted to drop for the fifth straight week. The slowdown in US production added to the efforts of the Organization of the Petroleum Exporting Countries (OPEC) and other major producers to limit output. The oil rally faced a tough test on Tuesday as prices fell close to 2 percent as OPEC production could rise despite the agreement in place.

The EUR/USD fell 0.242 percent on Tuesday. The single currency depreciated versus the USD after the price had hit a 15 month high. Profit taking ahead of the US employment data releases weakened the EUR. The USD has been on the back foot for the past five months losing as much as 9 percent as political drama in Washington has stolen the spotlight away from fundamentals and monetary policy. Low inflation remains a concern but with steady growth and rising spending the Fed could raise the US benchmark rate once again in 2017.

The CME FedWatch tool is showing a 98.6 percent probability of the Fed funds rate staying at 100–125 in September but the December Federal Open Market Committee (FOMC) meeting is now 50/50 to end with rates going to 125–150 basis points. The Fed moved away from the patient mode it had displayed in the previous two years and has already hiked twice in 2017 and has signalled it will start to reduce the balance sheet it accumulated starting this fall.

The USD has been supported by the central bank, but the Trump administration has lost credibility after squandering important political capital by failing to push through health care reform. The market was pricing in tax reform and infrastructure spending in what was called the Trump trade, but as those policies kept being pushed back the USD depreciated. Tax reform is back on the agenda, but there are serious questions on how optimistic the Administration is when it talks about a obstacle free path for the policy.

Oil prices lost 2.078 percent in the last 24 hours. West Texas Intermediate is trading at $49.06 as details of a rise in OPEC production as published by Reuters. The deal between major producers has kept prices in the current range, but there are cracks starting to appear on the sustainability of the agreement.

Saudi Arabia has capped production more than any member to cover the gap left by nations that could not cut as quickly or a deep. Disruption issues in Nigeria and Libya exempted the producers from participating but as they get close to recovery their production pressures prices.

Weekly oil reports have dictated the direction of energy prices as lower inventories have given way to a surge in oil prices, but demand remains stagnant limiting how high prices could really go.

Market events to watch this week:

Wednesday, August 2
4:30 am GBP Construction PMI
8:15 am USD ADP Non-Farm Employment Change
10:30 am USD Crude Oil Inventories
9:30pm AUD Trade Balance
Thursday, August 3
4:30 am GBP Services PMI
7:00 am GBP BOE Inflation Report
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
7:30 am GBP BOE Gov Carney Speaks
8:30 am USD Unemployment Claims
10:00 am USD ISM Non-Manufacturing PMI
9:30 pm AUD RBA Monetary Policy Statement
9:30 pm AUD Retail Sales m/m
Friday, August 4
8:30 am CAD Employment Change
8:30 am CAD Trade Balance
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change

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