US nonfarm payroll employment rose by 528,000 in July, more than double what market consensus previously predicted, and the unemployment rate edged down to 3.5%, while salary pressure continued to surprise to the upside.
It is an exceptionally strong July US job market report, which dispels, at least in the short term, fears of a sharp decline in economic activity following the US's technical recession in Q2. Above all, the unexpected US labour market data heightened market expectations about future Fed rate hikes, resulting in a broad US dollar (DXY) rally.
Fed futures are currently assigning a 65% chance of a 75-basis-point increase in September, with the market-implied Fed target rate rising to 3.13%. Longer-dated Fed futures rates rose as well, with the December implied rate inching higher to 3.7% from 3.5% last week, effectively pricing in a full 25-basis-point increase.
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Chart of the day: Fed rate futures spike following US job market report
Forex market today: USD is King
- Friday's European market close saw the dollar index (DXY) spiking to 106.8, by 1% on the day.
- EUR/USD plunged to 1.016 giving up 0.8% on the day, while GBP/USD fell to 1.206, also losing 0.8%.
- The Japanese yen was the worst performer among the major currencies with USD/JPY breaking through at 135 (+1.8%), on the back of a widening of yield differentials between Treasuries and Japanese Government Bonds (JGBs).
- Rising US rate expectations and growing geopolitical tensions between China and the US following the visit of US House Speaker Nancy Pelosi to Taiwan also hurt the Australian (AUD) and New Zealand dollar (NZD), which both saw declines of more than 1% against the US dollar. The Chinese foreign ministry has announced that it will cancel climate change and military talks with the United States.
- The Canadian dollar (CAD) and the Swiss franc (CHF) lost 0.6% and 0.9%, respectively, against the dollar.
Currency strength matrix – August 5th, 2022
Euro-dollar (EUR/USD) – Chart analysis: eyes on 1.00?
The July US labour market report was a crushing blow for EUR/USD, potentially putting an end to the pair's feeble and brief uptrend that began after the Federal Reserve meeting in July.
Macroeconomic fundamentals between the United States and the Eurozone continue to diverge, with the United States exhibiting resilience on the external balance and labour market fronts, while the EU is on the verge of a severe recession due to the collapse of consumer and business confidence as a result of the effects of the gas crisis.
US/EU 2-year yield differentials widened to 275 basis points, hitting new highs since May 2019, already trading as if EUR/USD were at parity.
The next key figure is the US July CPI print, out on August 10th. A strong print of US inflation would seriously increase the chances of seeing a new 75 basis point hike by the Fed in September, and this would lead EUR/USD to test the parity level again.
Pound-dollar (GBP/USD) live chart: BoE rate hikes alone are not enough for the pound
The Bank of England (BoE) raised its Bank rate by half a percentage point to 1.75 percent at its August meeting, the highest rate hike in the UK in 27 years, but warned that the UK economy is expected to enter a prolonged recession in the fourth quarter of this year.
The BoE expects inflation to peak at 13.3% in October, but rate hikes will be decided meeting-by-meeting, disappointing pound bulls.
As we've said before, if the US economy continues to be strong, there is a risk that the rate difference between Treasuries and gilts, will get wider, putting downward pressure on the GBP/USD exchange rate.
The robust reading of the July’s US nonfarm payrolls bolster the case for a widening gap between the US and the UK's macroeconomic fundamentals, which is bad news for sterling.
The next level of support on the daily chart is at 1.195 (lows of July 26). If GBP/USD breaks below this level, it will likely retest the psychological level of 1.18 and the two-year lows at 1.176.
Dollar-yen (USD/JPY) live chart: multi-decade highs in sight again?
The yen is once again experiencing the same nightmare it endured in the first half of the year, namely the inevitable widening of monetary policy differences between the Federal Reserve and the Bank of Japan.
Following the release of nonfarm payrolls, USD/JPY is having its most positive daily session since June 17, breaking through the 135.
Upwards, the next obstacle is between 136.5 and 137.5 (highs of 27 and 28 June). If this region is breached, the pair could test the multi-decade highs at 139.40 level.
Higher-than-expected US inflation next week could solidify the case of 75-basis-point hike in September, and a repricing across the future curve, pushing the USD/JPY toward the 139.40 test.