At the beginning of this week, the dollar set new two-year highs, which proved to be impermanent. The market seems to be already very overbought, and there are also fewer arguments for further strengthening of the USD.
It seems that the dollar lost the fourth day in a row, as there are speculations that Friday's US employment data will confirm the weakening of the trend observed in other economic data released this week - especially ISM indices. The US currency has fallen relative to most major currencies following disappointing data on industry and the service sector. Let us remind you that the ISM manufacturing index for fell in September to the lowest level since June 2008, and the index for the services sector was at its lowest level since August 2016. Importantly, in the context of today's labor market data publication, the pace of job creation was the weakest since February 2014 – according to the ISM report.
As a consequence, investors in the interest rate market began to price more chances for interest rate cuts by the Fed at the end of October. At the end of September, the probability of a cut at the next Federal Reserve meeting was 49 percent, now it has increased to almost 90 percent. Hence, a slight improvement in sentiment on Wall Street, where there were more chances for cheap money, as well as weakening of the dollar, which lower interest rates may not be favorable.
Today's publication of data from the US labor market can confirm the weakness of the US economy, which has long resisted the effects of the trade war. However, if the labor market situation is getting worse, it could be an argument for Trump to take a step back, because Americans are unlikely to want to earn less or lose their jobs just for Trump's idea.
The report from the US labor market will be announced today, on Friday, October 4th, at 14:30. The consensus for the NFP is 145,000, the unemployment rate is expected to remain at 3.7 percent, and the average hourly earnings increase is to be 3.2 percent y/y. Interestingly, investors from the options market insure against the EUR/USD rate increase. This may mean that they are afraid of disappointment in the US data and continuation of recent increases in the EUR/USD.
Daniel Kostecki, Chief Analyst of Conotoxia Ltd., a company from the group to which Cinkciarz.pl Sp. z o.o. belongs.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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