We have a big week incoming for the US dollar.
The first thing to consider is risk appetite.
After a shaky start to this week (in part due to stronger than expected Eurozone PMI data), USD staged a strong recovery from Wednesday onwards as risk assets stumbled.
The flight to safety was triggered primarily by escalating Covid-19 second wave concerns (with focus on the US and a few smaller localised outbreaks in the EU), as well as a resurgence in the threat of protectionism from the US; a further $3.1bln of European exports to the US are now being threatened with tariffs, although the WTO decision on whether the EU can hit US exports with tariffs over Boeing subsidies has now been delayed until September or October, so this story may die down a little.
Will these themes continue to dominate sentiment next week? Covid-19 second wave concerns certainly will, after multiple US states halted their reopening plans and Houston ICU beds hit full capacity. Markets may increasingly immune to the ever rising daily infection/hospitalisation/death count in new hotspots (California, Texas, Florida), but they would certainly not respond positively if further lockdowns come back into the discussion.
At the moment the guidance from officials is “no more lockdown”, but as more people start to die, this mentality could quickly shift.
While juggling these ongoing macro themes, we also have a big week for US data!
Namely, on Thursday we have the official June US jobs report from the Bureau of Labour Statistics (normally it is on Friday, but next Friday is the US national independence day holiday).
For a few months, NFP lost its usual position as the number one most closely watched US jobs data point. Traders preferred weekly jobless claims data, which gave a timelier update.
However, that has changed since last month’s NFP. As a reminder, markets were stunned as the report revealed that rather than 8mln jobs being lost in May, 2.5mln jobs had been created, meaning the US unemployment rate was actually 13.3%, rather than the expected 19.8%. Its safe to say, this is the largest beat on expectations in US data history and at the time triggered massive risk on as expectations for a V-shaped recovery were pumped up.
However, those expectations for a V-shaped recovery are being increasingly tested by the resurgence in the virus in the US. Therefore, we may see markets look through any strong data as they weigh the risk that this rebound may be short-lived.
Another thing to consider is how USD might react to the NFP data. If it is better than expected, will it strengthen (due to strong US fundamentals) or weaken, due to lack of demand for havens?
It will be a tough one to gauge, but may be very telling for the dollar’s reaction function going forward!
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