After an initial spike in volatility in the wake of the hawkish hints of the FOMC meeting, markets have settled down in recent sessions. This could continue during the early part of the week. However, interest will pick up again in the second half of the week as the crucial US labor market data comes into focus, with Non-farm Payrolls on Friday. Elsewhere, traders will be looking for the implications of Eurozone inflation.
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The importance of the US labor market is growing as markets look towards taper timing. Non-farm Payrolls will be this week.
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Eurozone inflation expected to remain subdued, EUR unlikely to be helped
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Markets: Watching USD moves and whether Indices can hold up.
It’s all about US jobs this week
The FOMC meeting contained a nod to the implications of inflation. However, there is still the bulk of the FOMC that are looking for decisive improvement in the jobs side of the dual mandate before they can shift away from the emergency monetary policy status.
This week’s Non-farm Payrolls will garner big attention after the last two months disappointed consensus expectations. Another +700,000 jobs are expected to be added back in June.
The improvement in the labor market continues, but the pace is still slightly underwhelming. The concern is that there are still around 8 million fewer jobs than pre-pandemic. The Fed needs to see “substantial further progress” before it can start tightening monetary policy. The laborforce participation rate picking up decisively would be something to watch out for too.
We are though in a phase of “good news is bad” for risk appetite. Upside surprises in the labor market data improve the chances of the Fed tightening policy sooner. This would be USD positive but negative for risk appetite. However, any disappointment of more than -100,000 jobs in the headling Nonfarm Payrolls data would be negative for USD which has strengthened on the hawkish hints of the recent FOMC meeting.
Weekly jobless claims have underwhelmed recently but beware of reading too much into the private ADP employment change which has been rather erratic in calling the government’s labor data.
Eurozone inflation unlikely to spark any EUR recovery
Wednesday’s Eurozone flash HICP inflation is expected to show a decline in the June data. Headline HICP of 1.9% (down from 2.0% in May) and core HICP down to +0.9% (+1.0% in May) is hardly a problem for the European Central Bank. Coming where other economies are grappling with the prospect of inflation being above target, the ECB is still struggling to even hit its targets at all.
Hitting or even missing the consensus will certainly not help the EUR (which has struggled to find sustainable buyers since the dovish lean from the ECB a few weeks ago). It is always worth watching for the German inflation reading a day before (Tuesday morning) to be potentially indicative for the Eurozone wide data.
Markets to Watch: USD, Gold and Indices
USD will be the key mover in payrolls week. Forex majors have become stuck in a range recently, and this may continue for the early part of this week. However, key levels need to be watched on payrolls:
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EUR/USD – support at 1.1845, resistance at 1.1975
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GBP/USD – support at 1.3785, resistance at 1.4000
Gold (MT5 code: XAUUSD) is another market in consolidation, but could begin to find direction once more later this week – support at $1760 needs to hold to prevent the development of the next leg lower into the $1720s.
With equity indices edging higher in recent sessions, the risk is for another bout of near term profit-taking. The S&P 500 is into all-time highs and positive surprises in the US data could tip into some profit-taking for the S&P 500 futures (MT5 code: SP500ft).
Conclusion
This week has a big focus on the US labor market, with Non-farm Payrolls on Friday. The reaction could one where markets see good news as supportive for USD but bad for risk appetite.
