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Talking Points:

- This morning’s NFP report printed an abysmal +38k versus an expectation of +160k.

- USD weakness has been the predominant price action theme on the morning as US rate hike expectations get priced-out further and further.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator.

This morning’s Non-Farm Payrolls report printed at the lowest level in over six years, as +38k jobs were added to American payrolls in the month of May, far below the expectation for +160k jobs to have been added. The unemployment rate did drop to 4.7% from a prior read of 5%, although this likely has more to do with the massive reduction in the labor force participation rate dropping to 62.6% as more than 458,000 job seekers ‘aged’ out of the workforce. But the bad news didn’t end there, as we also saw revisions to prior month NFP’s with April being revised down to +123k from the prior print of +160k (reduction of -37k).

The near-immediate impact of this out-sized miss was a dramatic drop in the US Dollar as rate hike expectations for June and July plummeted; making it increasingly less likely that we’ll see any actual moves from the Federal Reserve at their upcoming rate decisions. Interestingly, Chair Janet Yellen is speaking on Monday morning in Philadelphia, so we may get some information on this front fairly quickly. Coming into May, expectations for a hike were near non-existent at approximately 5% after last month’s NFP miss. But throughout the month, multiple Fed members provided hawkish commentary pertaining to future rate hikes, seemingly increasing those rate hike expectations; and when the meeting minutes from the Fed’s April meeting were released on May 18th, the Fed had even went so far as to say that they felt markets were underpricing the probability of a hike in June. This only added additional strength to USD as rate hike expectations firmed.

But this morning’s outsized NFP-miss, with the lowest number of jobs added in over six years, has now brought those probabilities back into question as odds for a hike in June have moved down, again, to 5%. This has sent the US Dollar spiraling lower, and many major currencies have received a considerable pop on the back of this weakness. On the chart below, we’re looking at the US Dollar with the same technical applications that we’ve been following.

Is the Dollar Downtrend Coming Back to Global Markets?

Charts prepared by James Stanley

If the Dollar remains offered, what might catch a bid?

One of the pairs that we’ve been following on the theme of USD-weakness has been GBP/USD, as April and May brought a resurgence in the Sterling as Brexit-fears became priced-out of the market. But those fears were re-fired earlier in the week as a series of polls reflected a slight majority in the ‘leave’ camp, thereby denting the up-trend that GBP/USD had been working on. But over the past few days, GBP/USD has found support and with this morning’s rush of USD-weakness, the pair has popped higher into a well-heeled resistance zone.

Is the Dollar Downtrend Coming Back to Global Markets?

Charts prepared by James Stanley

Gold

If we are, in fact, seeing a re-pricing of rate hike odds, another market that may catch a continued bid is in Gold, which had a tumultuous month of May as the US Dollar firmed on those more ebullient rate hike expectations. Should USD-weakness persist, we may see another swing higher in Gold prices. In the midst of last month’s tumult, Gold prices found support at a long-term Fibonacci level that also happens to be a major psychological level of $1,200. This morning’s run of USD-weakness has brought a pop-higher in Gold prices, and with a higher-high and higher-low now showing on the four-hour chart, traders can watch for a continuation in the effort of catching the next ‘higher-low.’

Is the Dollar Downtrend Coming Back to Global Markets?

Charts prepared by James Stanley

The Japanese Yen

We discussed this at length earlier this week after Shinzo Abe delayed the scheduled sales tax increase for Japan. This highlighted a case of divergence between Japanese and US policy makers. Mr. Abe warned of global pressures while attempting to brace the Japanese economy for impact by a) delaying that sales tax increase, which would likely only dampen consumer sentiment and b) announcing that a ‘comprehensive, bold economic stimulus package’ would be coming to Japan this fall.

But this was happening at the same time that US policy makers were talking up economic health and the prospects of higher rates in the US. This was a heavy case of divergence and given the domino effect that can take place in the global economy and global markets, it was unlikely that we’d see this divergence continue for too long.

Mr. Abe’s announcement sent the Yen into a surge while the Nikkei began to drop again as it had earlier in the year. Should US rate hike policy continue to get priced-lower across markets, traders could look for a continuation of Japanese Yen strength as risk aversion and USD-weakness flows combine for further impact lower in USD/JPY.

Should the global economy go back into a worrisome state, similar to the beginning of the year, the Japanese Yen may continue to shine; and we’ve been looking at the prospect of the Japanese Yen as the ‘safe-haven of choice’ for the better part of the last nine months.

Is the Dollar Downtrend Coming Back to Global Markets?

Charts prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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