The latest report from the U.S. Bureau of Labor Statistics has been deemed somewhat unsatisfactory by the markets.
Released last Wednesday, it revealed that the U.S. economy employed 818,000 fewer people than previously estimated as of March 2024.
This downward revision—the largest in 15 years—suggests that the labour market may have been cooling earlier than anticipated. The adjustment reduces total job growth for the 12-month period from 2.9 million to 2.1 million, marking a 38% overstatement in initial figures.
The revised data has raised concerns about the true state of the U.S. economy, challenging the narrative that has supported the Federal Reserve’s reluctance to cut interest rates. Despite Goldman Sachs economists downplaying the impact, noting that contributions from undocumented immigrants may soften the blow, this revision could influence the Fed’s forthcoming decisions.
At the recent Jackson Hole meeting, Fed Chair Jerome Powell hinted at the possibility of interest rate cuts as early as September, expressing confidence that inflation is on a sustainable path toward 2%. As it stands, CME rate probabilities indicate a 100% chance of a rate cut, with a 76.0% likelihood of a 25 basis point cut in September.
The market is now pricing in additional cuts—a 50 basis point reduction in November and a further 25 basis point cut in December—bringing three rate cuts back into play for the remainder of the year.
The market’s reaction to these developments has been cautious, with traders closely monitoring the USD Index (USDX) and other key currency pairs. The USDX, which touched a high of 101.48 on Friday before sellers emerged following Powell’s speech, is expected to consolidate before making another push downward.
Traders are now watching for bullish price action around 100.50 or 100.00, while resistance at 101.40 could cap any near-term gains.
In the EURUSD pair, the response to Powell’s speech was a rally, pushing the pair higher. The next level to watch is 1.1220, where price action will determine if consolidation precedes another leg up. The GBPUSD also saw gains, rising above 1.3150, with traders now eyeing 1.3270 for further developments.
The USDJPY remains at a crossroads, with potential movement in either direction. Traders are focusing on 143.10 as a critical level—consolidation here could lead to a break below 141.684. Conversely, should the pair rise, bearish price action is expected around 149.70 or 152.40.
USDCHF is poised for an upward consolidation, with bearish signals anticipated at 0.8590, 0.8620, or 0.8640. Meanwhile, commodity-linked currencies like AUDUSD and NZDUSD are expected to see downward consolidation before resuming their upward trends. Key levels to monitor are 0.6820 for AUDUSD and 0.6250 for NZDUSD.
In the commodities market, USOil has traded higher, reaching 75.90. The price could consolidate at this level, with the next area of interest being 77.80. Gold, which broke above the monitored 2505 area, is expected to continue its upward momentum, potentially forming a larger consolidation pattern at higher levels.
The SP500 index, defying expectations of a deeper consolidation, has moved up and could break a new all-time high above 5677.70. Should the index consolidate downward, traders will be looking for bullish price action around 5460.
Bitcoin has similarly traded higher without reaching the monitored area, with 66100 now in focus as the next key level. Natural Gas, on the other hand, is consolidating around 2.04, with a possible test of 1.93 on the horizon. Should consolidation occur again at 1.93, Natural Gas could be poised for a new monthly low.
On Tuesday, attention will be on the USD with the release of the Conference Board’s Consumer Confidence index. Forecasts suggest a slight dip to 100.2 from the previous reading of 100.3.
While this might seem like a minor adjustment, the implications could cause a market upset if the data surprises in either direction. A stronger-than-expected reading could temporarily bolster the USD, while a weaker print may reinforce the narrative of a cooling economy, pushing the USD lower.
Wednesday brings Australia’s CPI data, with the year-on-year figure expected to show a decline to 3.4% from 3.8%. This could weigh on the AUDUSD if the data aligns with expectations, likely leading to a downward consolidation.
Thursday will be a pivotal day for the EURUSD, as Germany releases its preliminary CPI figures alongside the Eurozone’s preliminary GDP data. Germany’s CPI is forecasted to stagnate at 0.0%, a sharp contrast to the previous 0.3% growth.
This could add to the pressure on the EURUSD, especially if the Eurozone’s GDP data, expected to hold steady at 2.8% quarter-on-quarter, fails to impress. Traders should be prepared for volatility, as the EURUSD may react strongly to any deviations from these forecasts.
Friday, a day we find to be most important this week, will see the release of the Eurozone’s CPI Flash Estimates, alongside the U.S. Core PCE Price Index—both of which are key indicators of inflationary trends.
The Eurozone’s CPI is expected to slow to 2.2% from 2.6%, which could lead to further downward consolidation in the EURUSD.
The U.S. Core PCE is something traders should take note of this week. Forecast unchanged at 0.2%, this indicator is closely watched by the Federal Reserve as it reflects the underlying inflation trends in the economy, excluding volatile food and energy prices. The outcome of this data release will heavily influence market expectations regarding the Fed’s future interest rate decisions.
If the Core PCE Index comes in higher than expected, it could trigger a market reaction, as it would suggest that inflationary pressures are more persistent than previously thought. This scenario could lead to a stronger USD, a potential sell-off in equities, and increased volatility across global markets as traders anticipate a more hawkish Fed stance.
On the other hand, if the data shows that inflation is continuing to moderate, it would reinforce the case for the Fed to proceed with the anticipated rate cuts in September and beyond.
Traders will need to carefully monitor these developments, as this could support a rally in risk assets, including equities and commodities, while putting downward pressure on the USD.
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