FX Market Update – Non-Farm Payrolls in Focus as USD Awaits Key Data.

• USD – Remains driven by today’s Non-Farm Payrolls release, with the dollar lacking a clear directional bias after the Sintra central bank panel. Markets are looking to the data for fresh guidance on the Federal Reserve’s next move, making volatility likely.

• EUR – Is on the back foot after softer-than-expected Eurozone inflation reinforced expectations that price pressures are easing, reducing the urgency for further ECB tightening.
  

• GBP – Is outperforming despite the lack of a clear catalyst, supported by a quieter political backdrop and comments from Governor Bailey that have helped temper expectations of near-term rate cuts.

USD:

Today’s focus is firmly on the US Non-Farm Payrolls report, which is expected to be the key driver for the dollar. Yesterday’s central bank panel in Sintra prompted some temporary dollar weakness after comments from Fed policymaker Kevin Warsh failed to reinforce the market’s hawkish expectations, instead leaving investors with little additional guidance on the Fed’s outlook. As a result, today’s labour market data carries even greater significance.

Following last month’s stronger-than-expected 172K payroll gain, consensus forecasts point to a more moderate increase of around 113K for June. A stronger-than-expected reading would likely reinforce expectations that the Federal Reserve will keep interest rates higher for longer, providing support for the dollar. Conversely, a weaker print would increase speculation around future policy easing and could weigh on the greenback.

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EUR: 

The euro came under pressure yesterday after Eurozone inflation slowed more than expected, falling from 3.2% to 2.8%. The softer inflation reading has strengthened the view that price pressures are easing across the region, reducing the need for further policy tightening from the European Central Bank.

While markets still see the possibility of one further rate hike this year, confidence in that outlook has weakened. Lower energy price pressures, improving inflation dynamics and concerns over the Eurozone growth outlook are all contributing to expectations that the ECB may take a more cautious approach. Unless economic data begins to surprise to the upside, the euro may struggle to find sustained support in the near term.

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GBP: 

Sterling is enjoying a relatively strong session, outperforming both the dollar and the euro despite the absence of a clear domestic catalyst. A quieter political backdrop has helped improve sentiment towards the pound, allowing it to outperform many of its G10 peers over recent weeks.

Comments from Bank of England Governor Andrew Bailey also attracted attention yesterday after he suggested that rate cuts remain “off the table.” While this broadly aligned with existing market expectations, it has helped underpin sterling by reinforcing the view that UK interest rates are likely to remain elevated for longer. With markets continuing to price a relatively high probability of another rate hike this year, the pound remains well supported unless incoming data materially changes the policy outlook.

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