Jobs Report Key for Further Dollar Strength

GBP

The pound weakened against every G10 currency last week as the markets lost conference in the UK economy due to energy and stagflation concerns. What is most concerning for sterling is this weakness wasn’t reversed with hawkish comments from Andrew Bailey and the OIS curve indicating that a markets have priced in a interest rate rise to 0.75% by the end of 2022. This is because the markets see this move as a reaction from the Bank of England to fight inflation caused by rising energy prices opposed to inflation caused by real growth within the economy. Against the dollar a new 2021 low was reached last week as the dollar continued its rally as investors looked for safety.

The pound will continue to be vulnerable going into this week as the stagflation story continues to worry investors. Any news out of the Bank of England will be followed closely as markets are expecting a 0.1% interest rate rise at the November meeting. Dave Ramsden who is one of the most hawkish members of the MPC will speaking on Tuesday. This has the potential to drive the pound higher if he argues for even more tightening from the BOE. The economic calendar is extremely light for sterling this week with no medium or high impact data.

USD

The dollar continued its rally last week as investors continue to look for safe-havens as global energy prices and inflation continue to rise rapidly. The dollar index which tracks the performance versus 6 other major currencies hit a yearly high on Wednesday, but many analysts commented that this due to end of quarter corporate and institutional demand for the dollar rather than investor driven. There was a pleather of positive data out of the US last week, the highlights including: Durable goods orders at 1.8% versus a consensus of 0.7%; Q2 GDP at 6.7% versus a consensus of 6.6%; ISM Manufacturing PMI at 61.1 versus a consensus of 59.6. Though it wasn’t all positive for the dollar as Jerome Powell voiced his concerns over rising inflation in the US describing the situation as “frustrating”.

The jobs report and non-farm payrolls on Friday will be the main talking point for the dollar this week. Markets are expecting 460K new jobs in the US economy versus the previous reading of 235K. The Fed needs a strong figure to back up their plans for tapering going into November and raising interest rates in late 2022. If it’s a poor number, then Jerome Powell and his colleagues will find themselves in a tricky situation of rising prices and low economic growth. Other major data releases for the dollar include ISM services PMI for September on Tuesday and ADP employment change on Wednesday.

EUR

The euro struggled against the dollar last week as it lost out to safe-haven demand but managed to gain 0.3% versus the pound. The Eurozone was also feeling the pressure of rising inflation with a CPI reading of 3.4% YoY and 1.9% for core. This came as a surprise to the ECB who had expected high inflation but not this high. ECB President and vocal dove, Christine Lagarde still believes that inflation will be transitionary and warns against a knee jerk reaction. This view seemed to be shared by investors who failed to rally the euro after the data release.

The other central banks of Europe will make the headlines this week which will highlight the comparison between them and the ECB. The Czech National Bank raised rates by 0.75% last week and Poland are currently facing potential inflation of 7% with current base rate of 0.1%. There are many more speeches from the ECB this week including Lagarde on Tuesday. Though none of these speeches are likely to rock the boat and will continue the narrative of inflation being transitionary. On the data front, Markit PMI Composite for September is expected at 56.1 which will match the previous reading and Retail Sales will for August are expected at 0.4% down from a previous reading of 3.1%.