With the USD index correcting by more than 7% since the early November peak, it is evident that markets have moved toward a bearish dollar narrative. It’s also evident that such a shift is primarily due to expectations that the Fed is nearing the end of its tightening cycle. Fed Funds futures show peak rate expectations have dropped below 4.90%, after having priced in 5.25% less than a month ago.
It seems that markets are approaching today’s US payrolls with a strong bearish rhetoric on the dollar unless we see a convincingly strong payroll read. The consensus is centred around 200k with the unemployment rate staying at 3.7%. These numbers would be quite respectable and indicate that the jobs market has indeed remained extremely tight, but while it may halt the dollar’s trend, it could fail to invert it. All in all, the balance of risks appears slightly tilted to the downside for the dollar today. A contraction in payrolls to 150k could generate a fresh round of large USD selling.
Payrolls will also be published in Canada today. Employment data has been very volatile with the October figures coming in at a very strong 108k, which was entirely driven by full-time hiring. The consensus is centred around a very small 10k increase, and there is a high chance we could see a negative read. This would probably keep markets leaning in favour of a 25bp rate hike by the Bank of Canada next week. However, there is room for some upside surprise today in the jobs numbers which could set the stage for another 50bp by the BoC. Observe the USD/CAD trends.
EUR/USD moves will likely be a function of the market’s reaction to US payrolls today. There is risk that the pair could explore 1.0600 with no clear resistance levels until the 1.0780 6-month highs. The recovery in business sentiment in the eurozone has undoubtedly been the result of lower gas prices, which have benefitted from mild weather in Europe. On the domestic side, we’ll see PPI numbers in the eurozone today, and hear from ECB president Christine Lagarde again. Yesterday, she sounded quite hawkish, signalling the need to keep inflation expectations anchored and implicitly leaving the door open for a 75bp move in December. Markets currently price in 55bp, and we are calling for a half-point hike.
There are no domestic drivers for the pound today given a light data calendar and no Bank of England speakers. As discussed in the dollar section above, US payrolls may fail to stop the current downward dollar trend and GBP/USD may find a bit more support around 1.2300-1.2350. Over the longer term, a return to 1.1500 around the turn of the year seems more likely.