US Dollar Looks to Jobs Data to Confirm Hawkish Fed Rhetoric

Talking Points:

• FX markets at standstill in Asia as US payrolls data looms ahead
• US Dollar to rise if upbeat jobs figures bolster Fed rate hike bets
• Pre-holiday liquidity drain may amplify volatility after event risk

Currency markets marked time in overnight trade, with investors seemingly unwilling to show directional commitment ahead before the release of Augusts’ much-anticipated US Employment report. The economy is expected to have added 180k jobs last month, down from the 255k gain recorded in July but close to the 190k average approvingly cited last week by Fed Chair Janet Yellen as she argued “the case for an increase in the federal funds rate has strengthened”. The headline unemployment rate is expected to tick down to 4.8 percent.

Traders will look to the outcome to confirm or contradict an up-shift in the projected Fed rate hike timeline triggered byYellen’s remarks and reinforced by similar sentiments voiced by Vice Chair Stanley Fischer. A meaningful upside surprise akin to those in June and July is likely to boost near-term rate hike speculation, sending the US Dollar broadly higher. Alternatively, soft payrolls print will probably prove negative for the benchmark currency.

As it stands, markets are pricing in a 59.8 percent probability of a rate hike before the end of the year, up from 37.3 percent a month ago. Looking over the past 12 months, the greenback has added an average of 0.1 percent in the hour after the release of payrolls data, with upside and downside extremes of 0.5 and 0.3 percent respectively. Draining liquidity ahead of the Labor Day holiday in the US may amplify price swings this time around however.

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Asia Session

European Session

Critical Levels

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

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