USD consolidates ahead of jobs report
By Arnaud Masset
Yesterday, I argued that the dollar may have reached a bottom and that further weakness is not justified. Looking at the FX market this morning, it seems that the dollar’s bounce back is not for today as the greenback consolidated against most of its peers, unable to extend the modest gains of the last few days. There are several reasons for that. Beside expectations that the Fed will have to backpedal on tightening and balance sheet unwinding amid stalling economic growth as well as the arrival of the ECB on the tightening side, the biggest strain on the dollar these days is Donald Trump.
The US President has had quite a negative effect on the dollar since he took office. The government’s inability to carry out reforms and the political uncertainty, both at the international and national levels, generated by its management style have made investors doubtful its presidency will support the US economy and, by extension, the greenback.
The July jobs report will be the main attraction of the day. Non-farm payrolls are expected to increase 180,000 in July, down from 222,000 in the previous month. Economists surveyed anticipate the unemployment rate to have edged down from 4.4% to 4.3%. Finally, wage growth is expected to have slowed down, with average hourly earnings growing 2.4% y/y versus 2.5% a month ago. However, on a month-on-month basis, wages should have grown 0.3% compared to 0.2% in July.
Overall, investors seem to have become less sensitive to news from the job market. Therefore, there is little chance it’ll move the US dollar substantially today. However, given the overall negative dollar environment, disappointing data will likely affect more the USD than good ones.
Status quo for the Bank of England
By Yann Quelenn
There wasn’t a surprise yesterday: the BoE held rates unchanged at 0.25% and the asset purchase target will be kept at GBP 435 billion. The purchase of GBP 10 billion in corporate bonds as part of the BoE’s quantitative easing programme was also not changed.
However, the British central bank slashed its growth forecast to 1.7% for this year from 1.9%. Policymakers underlined concerns about consumer spending growth, which is too slow to drive overall growth higher. On top of that, The outcome of Brexit negotiations remain uncertain and investment levels should likely diminish on those fears.
We still consider that the Brexit vote has had, for the time being, a good effect by lowering the pound’s value, which is why we should see inflation heading upwards, probably in October. It is definitely clear that the sterling’s decline accounts for the growing inflation, and inflation forecasts for 2018 have been raised to 2.5% from 2.4%. After 2019, inflation is expected to hold higher than the BoE target. This should likely trigger rate hikes at some point – BoE policymakers are indicating two hikes. We remain bullish on the pound as, in our view, markets are still overestimating the Brexit effect.