Key points:
The U.S. dollar stayed firm near a two-week high against the yen and euro on Tuesday, reflecting cautious investor sentiment ahead of an influx of economic data, including Friday’s highly anticipated U.S. payrolls report.
This data will likely be pivotal in shaping expectations for the Federal Reserve’s interest rate decision in mid-September.
The euro (EUR/USD) traded at $1.1060, just above the two-week low of $1.1042 hit in the previous session. Meanwhile, the yen (USD/JPY) was trading at 147.10 per dollar, close to Monday’s two-week low of 147.16. These movements underscore the market’s uncertainty as traders await the labour market data that could either reinforce or challenge the Fed’s signals on rate cuts.
See: Japanese yen trading at 146.703 as seen on the VT Markets app.
Looking at the charts, we can see the USD/JPY chart showing a clear downtrend since it peaked at 161.949 earlier this year. The pair has recently found some support near 141.69 but remains under pressure as traders await key U.S. payrolls data, which could influence the Federal Reserve’s next move on interest rates.
Federal Reserve Chair Jerome Powell’s recent remarks have put the spotlight on the labour market, with many market participants interpreting his comments as a signal that the Fed may soon begin cutting interest rates.
This has heightened the importance of this week’s job market data, including job openings on Wednesday and jobless claims on Thursday, which will serve as a precursor to the critical payrolls data on Friday.
For the USDJPY, the moving averages (MA) suggest a bearish sentiment, with the short-term MA remaining below the long-term MA, reinforcing the overall downward trend. The MACD is also showing signs of a potential trend reversal, with the histogram turning positive, but it’s still too early to confirm a significant change in momentum.
In the current environment, any signs of weakness in the U.S. labour market could accelerate the Fed’s shift towards rate cuts, potentially adding more downward pressure on the dollar against the yen. Conversely, stronger-than-expected data could provide temporary relief for the dollar, although the broader downtrend may still persist given the growing expectations of a more dovish Fed.
Currently, markets are pricing in a 69% chance of a 25 basis point (bps) rate cut when the Fed meets on September 17-18. However, there is still a 31% probability of a more aggressive 50 bps cut. The abundance of labour data this week will be crucial in resolving the ongoing debate between these two outcomes.
Economists anticipate that 165,000 U.S. jobs were added in August, a jump from the 114,000 increase seen in the previous month. This expectation sets the stage for a potentially volatile market reaction, depending on whether the actual data aligns with or diverges from these projections.
The dollar index (DXY), which measures the U.S. currency against six major rivals, was at 101.69 in early trading, just shy of the two-week high of 101.79 reached on Monday. The index’s 2.2% decline in August was driven by expectations of U.S. rate cuts, reflecting the market’s ongoing recalibration of Fed policy expectations.
You might be interested: Uncertain markets brace for employment data
In other currencies, sterling (GBP/USD) dipped slightly to $1.31425, the Australian dollar (AUD/USD) was down 0.14% at $0.6782, and the New Zealand dollar (NZD/USD) fell 0.18% to $0.6223.
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