US Dollar Outlook Favors Near-Term Weakness on Payrolls Data

Talking Points:

• US Dollar: Path of Least Resistance Favors Weakness on May Payrolls Data
• Euro Underperforms in Quiet Asia Trade as Greece Delays IMF Repayment
• See Economic Releases Directly on Your Charts with the DailyFX News App

Most major currencies were little-changed in overnight trade as traders withheld directional conviction ahead of the upcoming release of May’s US Employmentreport. The economy is expected to have added 226,000 jobs last month, marking a miniscule improvement from the 223,000 increase in April. The unemployment rate is forecast to remain unchanged at 5.4 percent.

A print in the general vicinity of consensus would serve to reinforce standing priced-in expectations for the Fed’s rate hike timeline, which imply a 25bps increase in October. Critically, this outlook has remained largely unchanged even as the US Dollar began to recover in mid-May, meaning the currency’s advance played out without support from improving policy bets. In this context, a reminder of the status quo via an in-line payrolls reading may shine a spotlight on the greenback’s decoupling from the fundamental backdrop and send prices lower.

Needless to say, a clearly disappointing payrolls reading is likewise likely to weigh on USD. Only a significant improvement that forces an up-shift in policy bets seems to have scope to generate gains. Even in this scenario however, upside momentum may not find lasting follow-through in the days ahead. A hawkish shift in rate views would be chasing the Dollar higher, in essence offering support to price action that has already occurred rather than triggering a new advance.

The Euro narrowly underperformed as markets continued to respond to Athens’ decision to invoke a rarely-used IMF provision that allows a country to bundle repayments in a given month into a single transaction. This will allow the government to delay delivery on €300 million previously due by the end of this week. The maneuver probably proved disheartening because it replaced hopes for speedier resolution ahead of a tight deadline with expectations of another month of haggling.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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