Can NonFarms change the Dollar climate?
UK manufacturing PMI declined less than expected from 57.00 to 56.7, indicating ongoing growth in the sector. However, the impact on Sterling trading was negligible and was driven mainly by the UK elections yesterday. The Euro pushed as high as the 1.1422 area, but no sustained break occurred whilst Cable finished the day little changed at 1.2882.
UK construction PMI is expected to ease slightly from 53.1 to 52.6 today. However, we would be highly surprised to see the indicator having a lasting impact on the Pound.
Auspicious readings from May’s ISM manufacturing and ADP payrolls being above expectations brought some optimism to the Greenback, which gained against the majority of its peers yesterday, ahead of the release of the NonFarm payrolls later today. Market consensus expects the economy to have added 185K jobs, while the jobless rate is seen at 4.4%.
Inflation pressures via wages will also be centre stage, with average hourly earnings seen rising at a monthly 0.2%. In fact, wages within the report have been gaining more weight month after month, as wages are key for inflation; with the Federal reserve’s (Fed) monetary policy decisions based on two main pillars: employment and inflation. Employment, according to the market is no longer a concern, but inflation is becoming one. Wages have a strong correlation with inflation, as people won’t spend if they don’t make enough to do so. Poor wages are a drag for inflation whereas strong wages are a sign that inflation may start to increase.
In the meantime, bets on a rate hike by the Fed later in the month continue to add resilience to the Buck, keeping further selling interest at bay for now. In this regard, CME Group’s FedWatch tool sees the probability of further tightening this month at above 95% from yesterday’s 90% and 67.6% from a month ago.
The final Euro-zone PMI manufacturing index was unchanged from the flash reading and confirmed at a 73-month high of 57.0. The European currency stays well supported by the likelihood of some change in the European Central Bank’s message towards a more hawkish view at its next meeting, and a moderate and relentless recovery in the region.
Further support comes from the speculative community, which added further contracts to the net long position during the week ending on May 23 as per the latest CFTC report. Recall that positioning turned Euro net long for the first time after three years in the week to May 9.
Data to Watch:
9:30am GBP PMI Construction (May).
10:00am EUR Producer Price Index (YoY) (Apr).
1:30pm USD Unemployment Rate (May), Labor Force Participation Rate (May), Average Hourly Earnings (YoY) (May), Average Weekly Hours (May), NonFarm Payrolls (May), Trade Balance (Apr).