First Friday of the month, we all know what happens, US employment data, specifically non-farm payrolls get published. This month, payrolls are forecast to expand 225,000, with a slight increase in average hourly earnings expected as well. The US unemployment rate currently hovers around 5.4%, and economists don’t expect a change in this number. We are now getting close to levels that in the past would have been considered full employment, although some senior Federal Reserve officials have recently argued that the unemployment rate indicative of full employment is probably lower. I have a feeling that argument has been pushed forward by those eager to keep interest rates where they are. That point of view received some support from the IMF recently, with claims that the US central bank’s credibility is at stake if unjustifiable rate rises are implemented before next year – strong stuff! The IMF argues that the level of uncertainty surrounding the US economy and the consequences for the rest of the world particularly in emerging economies could be dire if the process of normalisation begins too soon. I’m not sure what waiting until next year does for emerging economies, an interest rate hike in the United States will still have adverse consequences for the weak and unprepared. Are the IMF saying that these emerging economies are going to get their act together if their stay of execution is delayed until next year? I rather doubt it. Needless to say, the implications for the US dollar are obvious, strong evidence of robust employment conditions, and rising wage growth later on today will be a strong positive for the greenback.
Keeping the IMF in focus, Greece has notified that venerable institution, telling them that they will not make today’s scheduled €300m loan repayment. There has been strong opposition from Syriza party members to the bailout compromise agreed with creditors. As a consequence, the Greek government plans to bundle all the June payments together and make the repayment at the end of the month. We’re talking about a sum of about €1.5bn. Let’s be clear, Prime Minister Tsipras has already indicated that his government intends to make the payment, the opposition is from within his party. All the positive sounds about some sort of agreement with creditors have facilitated quite a nice little bounce in EUR/USD. From a technical perspective it’s worth noting that the highs of May, in my opinion a hugely significant level – 1.1467 – were not violated. This relegates the recent bullish EUR/USD price action to a mere correction within a bearish trend, and there is every chance that the party is over now. The trend still points towards dollar strength, and consequentially euro weakness. Looking at cable (GBP/USD) for corroboration, we see that the 1.5446 post-election rally reaction lows were not exceeded in the US dollars recent weak bout. From an Elliott Wave Theory perspective that is an important level to watch with the expectation that a new June low, or at least a re-test of the lows is only days away.
We anticipate that the price action going into the big data event later on today will be fairly benign, and most likely directionless, as the market holds its collective breath. As we’ve suggested strong data is likely to be dollar supportive. Perhaps the more interesting question is what the impact of soft data would be on the US dollar, it would certainly give us a better understanding of how much dollars are owned in the market. Either way this promises to be an interesting end to the week.
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