The United States dollar index (DXY) opened the week on a softer footing, extending losses from Friday after a weaker-than-expected U.S. labour market report renewed speculation that the Federal Reserve could cut interest rates as early as September.
The DXY fell back toward the 99.00 region, erasing gains from its recent nine-week high. July’s nonfarm payrolls (NFP) report showed the economy added just 73,000 jobs, well short of the 110,000 expected.
Revisions to May and June data removed a combined 258,000 jobs, while the unemployment rate ticked up to 4.2%. Wage growth, a key inflation gauge, rose 3.9% year-on-year, in line with forecasts.
Yields fell sharply across the curve, with the 10-year and 2-year Treasury yields down to 4.216% and 3.68%, respectively. The dovish repricing saw traders boost the odds of a Fed rate cut in September to 80.3%, up from under 40% earlier in the week, according to the CME Group FedWatch Tool.
Adding to the gloom, fresh data from the Institute for Supply Management (ISM) data showed U.S. manufacturing activity contracted, while the University of Michigan consumer sentiment also came in below market expectations.
Euro Jumps as Markets Price in U.S. Policy Easing
The euro started the week flat after surging over 1% against the U.S. dollar on Friday as investors reacted to the soft U.S. labour market report.
Traders moved swiftly to price in nearly 62 basis points of Fed easing by year-end, up from 34 bps before the data release.
Eurozone inflation data offered further support to the currency. July’s euro area inflation held steady at 2.0% year-on-year, slightly above forecasts of 1.9%.
The sticky inflation print may give the European Central Bank reason to remain cautious on rate cuts.
Aussie Remains Under Pressure Despite Weaker Greenback
Despite broad U.S. dollar weakness, the Australian dollar struggled to hold gains, with the AUD/USD currency pair starting the week near multi-week lows after logging its biggest weekly decline since March.
The pair initially spiked nearly 70 pips after the U.S. NFP miss, but the rally was quickly reversed as markets focused on growing expectations for a rate cut by the Reserve Bank of Australia at its 12 August policy meeting.
Q2 producer price index data confirmed moderating input cost pressures, with PPI rising just 3.4% year-on-year, down from 3.7% in Q1.
On a quarterly basis, the PPI slowed to 0.7%.
Meanwhile, the RBA’s preferred trimmed mean inflation measure remained within target at 2.7%, while headline CPI slowed to 2.1% in Q2.
Deputy Governor Andrew Hauser said the results were “very much as we had expected”, reinforcing the RBA’s disinflation outlook.
Sterling Rallies Ahead of BoE Decision
Sterling regained ground against the U.S. dollar, with GBP/USD currency pair climbing above 1.3200 as the Greenback came under pressure.
The pair bounced from recent four-month lows near 1.3140, helped by market repricing of a Fed rate cut.
Weaker U.S. jobs data weighed heavily on the dollar, which saw a broad correction as expectations for September easing increased.
In the UK, business activity data was pessimistic, as the S&P Global UK Manufacturing PMI rising to a six-month high of 48.0 in July, up from 47.7 in June but below the earlier flash estimate of 48.2.
Looking ahead, the Bank of England is expected to cut rates by 25 basis points this week, lowering the base rate to 4% - its lowest level in over two years.
Yen Gains on Risk Aversion and Yield Decline
The Japanese Yen strengthened against the U.S. dollar, with USD/JPY pair falling more than 2% from 150.91 to 147.28 following the disappointing U.S. jobs data late last week.
Safe-haven flows into the yen were amplified by falling U.S. yields and risk-off sentiment. The pair broke below its 20-day and 200-day simple moving averages, with technical momentum turning bearish.
At the time of writing, USD/JPY hovers near weekly lows around 147.24.
Key support now lies at 145.71, where the 50- and 100-day moving averages converge.
Economic Calendar - Week Ahead
On Monday, the United States will report factory orders and total vehicle sales.
On Tuesday, inflation data from South Korea will be released, followed by Australia’s final S&P Global PMIs and household spending figures. Japan will publish minutes from the Bank of Japan’s recent monetary policy meeting.
China will report the Caixin Services PMI, while Singapore will release retail sales data. In Europe, Producer Price Index data is due. Canada and the United States will both release trade balance, imports, and exports data.
In the U.S., Redbook sales and the ISM Services PMI are also expected.
On Wednesday, New Zealand will publish quarterly employment figures, while Japan reports average cash earnings. Eurozone retail sales data will also be released.
On Thursday, U.S. Federal Reserve Governor Lisa Cook is scheduled to deliver a speech. In Australia, Reserve Bank of Australia board member Christopher Kent will speak, followed by balance of trade, import, and export data. China will release its trade balance figures as well.
Japan is expected to publish leading and coincident economic indicators. In the United Kingdom, the Halifax House Price Index will be released alongside the Bank of England’s interest rate decision and monetary policy report.
The United States will publish jobless claims, Q2 nonfarm productivity, and wholesale inventory data.
On Friday, U.S. Federal Reserve member Musalem will speak, and the Fed’s balance sheet update will be released. Japan will publish household spending, the Bank of Japan’s summary of opinions, and the current account balance.
China will also publish its current account figures. In Canada, labour market data, including employment change and the unemployment rate, will be reported.
On Saturday, China will release inflation data and the Producer Price Index (PPI).
