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US Dollar May Rise as Jobs Report Boosts Fed Rate Hike Bets

US Dollar May Rise as Jobs Report Boosts Fed Rate Hike Bets

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Jobs report, Fed-speak put US rate hike speculation in the spotlight
  • US Dollar may rise vs. majors as wage inflation tops expectations
  • Comments from Governor Brainard may confirm Fed posture shift

All eyes are on May’s US Employment report in the final hours of the trading week. Consensus forecasts point to a 160k increase in payrolls, matching April’s outcome. The jobless rate is seen edging lower to 4.9 from 5 percent. Perhaps most critically, the year-on-year growth rate in average hourly earnings is expected to register at 2.5 percent, unchanged from the prior month.

While there is no precise definition of “full employment”, Fed seems to have adequately delivered on the jobs part of its mandate. Inflation has proven stubbornly low however, so making progress here seems most important in setting the stage for tightening monetary policy. An upside surprise on the hourly earnings reading has potential to do just that, fueling a hawkish shift in priced-in rate hike bets and sending the US Dollar broadly higher against its leading counterparts.

The case for such a scenario seems compelling. As noted earlier, leading manufacturing- and service-sector surveys from Markit Economics said inflation firmed in May. This was reinforced by ISM figures published earlier this week while the Fed’s Beige Book of regional economic conditions unambiguously asserted that “price pressures grew” and “tight job markets [were] widely noted”.

Fed-speak may add a layer of complexity to the equation. Comments from Chicago Fed President Charles Evans and Governor Lael Brainard are scheduled to cross the wires. Ms. Brainard has been one of most consistently dovish members of the rate-setting FOMC committee. If her remarks mirror the hawkish shift in officials’ rhetoric over recent weeks, this could go a long way toward convincing investors that a hike is in the offing.

Losing money trading the US Dollar? This might be why.

Asia Session

GMTCCYEVENTACTEXPPREV
22:45NZDValue of All Buildings SA (QoQ) (1Q)5.3%1.0%2.8%
23:30AUDAiG Perf of Services Index (MAY)51.5-49.7
00:00JPYLabor Cash Earnings (YoY) (APR)0.3%0.9%1.5%
00:00JPYReal Cash Earnings (YoY) (APR)0.6%-1.6%
01:00NZDANZ Commodity Price (MAY)1.0%--0.8%
01:45CNYCaixin China PMI Services (MAY)51.2-51.8
01:45CNYCaixin China PMI Composite (MAY)50.5-50.8
02:00JPYNikkei Japan PMI Services (MAY)50.4-49.3
02:00JPYNikkei Japan PMI Composite (MAY)49.2-48.9

European Session

GMTCCYEVENTEXPPREVIMPACT
06:30EURBundesbank Publishes Economic Forecasts --Low
07:45USDFed's Evans Speaks on Economy and Policy--Medium
07:45EURMarkit/ADACI Italy Services PMI (MAY)51.552.1Low
07:45EURMarkit/ADACI Italy Composite PMI (MAY)52.553.1Low
07:50EURMarkit France Services PMI (MAY F)51.851.8Low
07:50EURMarkit France Composite PMI (MAY F)51.151.1Low
07:55EURMarkit Germany Services PMI (MAY F)55.255.2Medium
07:55EURMarkit/BME Germany Composite PMI (MAY F)54.754.7Medium
08:00EURMarkit Eurozone Services PMI (MAY F)53.153.1Medium
08:00EURMarkit Eurozone Composite PMI (MAY F)52.952.9Medium
08:30GBPOfficial Reserves Changes (MAY)-$728mLow
08:30GBPMarkit/CIPS UK Services PMI (MAY)52.552.3Medium
08:30GBPMarkit/CIPS UK Composite PMI (MAY)52.351.9Medium
09:00EUREurozone Retail Sales MoM (APR)0.4%-0.5%Low
09:00EUREurozone Retail Sales (YoY) (APR)2.1%2.1%Low

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3
EUR/USD1.10221.10971.11241.11721.11991.12471.1322
GBP/USD1.43021.43681.43961.44341.44621.45001.4566

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

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