Espresso Morning Call: More volatility amid Nonfarm Payrolls

What we are looking for

• USD rebounding: With EUR and GBP falling away, major forex pairs have turned risk negative with the USD and JPY performing well. 

• Indices weighed down by worrying tech earnings: US futures have fallen overnight after disappointing after-hours results from US tech giants have weighed on sentiment. European indices are marginally weaker. 

• Commodities weighed by the pullback: Precious metals and oil fell back yesterday and are nursing losses this morning. 

• Data traders: Final UK Services PMI may do little to impact GBP as it is forecast to be unrevised. The big focus will be on the US Nonfarm Payrolls data. USD trades will be primarily impacted, but also watch for moves on commodities such as gold and US equity market futures too.

Overview

Central banks are in the final throws of tightening monetary policy. Or at least that is the takeaway from the Fed and the Bank of England decisions in recent days. This much has already been expected from the Fed, but a “dovish hike” from the BoE is leading to GBP underperformance. The ECB still has more tightening to do (maybe another 50 to 75 basis points of hikes) and this should help the EUR to ride out a corrective storm (at least relative to GBP). For now, though, it looks like the USD is trying to reclaim lost ground.

The question is for how long? After the tumult of the past 48 hours, there is more volatility likely today with the Nonfarm Payrolls. If the payrolls follow the lower ADP data, then the USD rebound could be curtailed. Risk appetite has also been flung around, first higher on the prospect of less hawkish central banks, but then hit by the disappointing corporate earnings from three of the US big tech giants. The tech-heavy NASDAQ is being hit, but European markets are less susceptible, for now.

It is a day of services PMIs and the US jobs report on the economic calendar. The final UK Services PMI is forecast to be unrevised from the flash so may not do much for GBP. Then into the US session, the focus is on the US Employment Situation report with Nonfarm Payrolls the highlight. Payrolls are expected to drop to below 200,000 but after the sizable downside surprise in the ADP employment change, this could open the door for a similar negative surprise in the payrolls. US Unemployment is expected to increase slightly and wage growth fall slightly. The US ISM Services PMI is expected to pick up marginally and improve back into mild expansion above 50.

Today’s news

Market sentiment turned sour: After the risk rally of yesterday, sentiment has soured overnight from the disappointing US tech earnings. Equities are falling and the safer haven USD and JPY are performing well.

US Treasury yields are holding ground ahead of payrolls: US yields were choppy but closed broadly flat yesterday. There is a cautious feel this morning too.

US earnings weigh on NASDAQ: The big risk rally from yesterday has unwound overnight with after-hours results from Amazon, Google and Apple all disappointing. This has pulled NASDAQ futures sharply lower and also weighed on S&P 500 futures too. European indices which are less exposed to tech are less impacted.

Japanese final PMIs slight downward revision: The final reading has been downwardly revised slightly to 50.7 on the composite (from 50.8 in the flash reading).

Chinese Caixin Composite PMI improves less than expected: The composite has improved back into expansion at 51.1 (up from 48.3 in December). However, this was lower than the forecast improvement to 52.8.

Eurozone final PMIs with a slight upward revision: Final Eurozone Composite PMI has had a slight upward revision to 50.3 in January (from the 50.2 flash)

Cryptocurrencies look to steady after bull failures: There were initial upside breaks on crypto yesterday, however, the moves failed to be sustained and pulled back into the close. The moves are relatively steady this morning. Bitcoin is -0.4% at $23350, with Ethereum around flat at $1635. 

Major Economic Data:

• UK final Composite PMI (at 09:30 GMT) The final January Composite PMI is forecast to be unrevised at 47.8 (down from 49.0 final December) 

• US Nonfarm Payrolls (at 13:30 GMT) The headline payrolls are expected to reduce to 185,000 in January (from 220,000 in December). Unemployment is forecast to increase to 3.6% (from 23.5%) with Average Hourly Earnings dropping to 4.3% (from 4.6%).

• US ISM Services (at 15:00 GMT) The ISM is forecast to improve slightly to 50.4 in January (from 49.6 in December).

Major markets outlook

Forex: USD is reclaiming some lost ground, but Nonfarm Payrolls will be key.

• EUR/USD broke sharply higher and moved above 1.1000 following the Fed, but this move has pulled back on the ECB. Now with Nonfarm Payrolls today the next volatility event lies ahead. How the market reacts into the close tonight could be key. If the support at 1.0800 is broken it would be a near-term corrective signal. Below 1.0765 would confirm this. The market is slightly weaker this morning but the data is key. Resistance is now in place at 1.1032. We still prefer to use supported weakness as an opportunity to buy but are cautious of near-term volatility. 

• GBP/USD has fallen over to breach 1.2260 support and is near-term corrective. There is a basis of support around 1.2080/1.2170 and if this is breached it would open a retreat towards the key January low at 1.1840. Momentum has soured with the RSI below 50. This reflects the near-term correction, but a move below 40 would signal a deeper correction. The initial resistance is 1.2265/1.2400.

• USD/JPY has once more seen a near-term rally fail around the falling 21-day moving average and the move lower is resuming. There is a sense of consolidation this morning but the negative configuration of momentum (daily RSI consistently faltering around 40/45) means we favour selling into strength for a test of the 127.20 low. Initial resistance is 129.10/129.90, whilst resistance is increasingly important between 130.55/131.55. 

Commodities: Gold and silver have pulled back sharply and are threatening a correction. Oil continues to fall.

• Gold posted a big bull failure candle with a bearish engulfing yesterday. This swing lower has also now formed a bearish divergence (with a failure swing) on the daily RSI. These are strong near-term corrective signals and mean that the support at $1896/$1901 could now come under pressure. Reaction to the payrolls report could be key today. There is initial resistance at $1918/$1928 but $1960 is now a key high.

• Silver had threatened an upside break of the consolidation rectangle between $23.11/$24.55 but a bull failure has turned the outlook sour once more. The daily RSI is under 50 again which is a slight corrective signal. A close below $22.11 would be a breakdown. Considering the number of false breaks (both upside and downside), waiting for a closing break of the range is needed for conviction.

• Brent Crude oil has been tracking decisively lower in recent sessiosn, with another decisive bear candle yesterday. As the RSI tracks lower below 50 the near-term move is lower. However, the medium-term outlook still has higher lows and higher highs in recent months, so the important reaction will be whether support starts to form above the key higher low at $77.40. Initial resistance is mounting between $83.75/$86.15. 

Indices: Wall Street is pulling back from the breakout, with European indices also being dragged back. 

• S&P 500 futures have just eased back this morning following the breakout above 4145 to the highest levels since August 2022. The initial breakout support comes between 4110/4145, but with strong positive momentum configuration (daily RSI confirms the breakout) the outlook is positive for moves to buy into weakness. The first important higher low is at 4007, with any supported weakness above there seen as an opportunity to buy.  Resistance is at yesterday’s high of 4208, just shy of the 4216 reaction high and the August rally high of 4327.

• German DAX has pulled back from the acceleration into the next resistance around 15550/15625. The daily RSI remains bullishly configured around 70 and we would continue to see any supported near-term weakness as a chance to buy. There is good breakout support around 15275, with 14910 a key higher low.

• FTSE 100 has moved higher in a more contained manner (compared to peer indices) but is also holding up well amid this morning’s broader pullback Technically the market is edging into stronger momentum with the RSI into the mid-60s. The outlook is positively configured for a retest of the high at 7884. Pulling higher in recent sessions leaves 7712 as a key basis of support now.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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