Big shifts in Fed expectations ahead of payrolls data

Big shifts in Fed expectations ahead of payrolls data

Forex
John J. Hardy

Global Head of Macro Strategy

Existential pain in the European Union may be shifting to slow-burn mode, even as Spain’s prime minister is set to leave today and the Italian populists are set to form a government after all. Now the focus swings back to the US economy and Federal Reserve expectations, which have undergone a significant shift.

Spain has seized headline real estate from Italy as PM Rajoy is set to fail a confidence vote or resign today. But despite the high drama, there was never really an EU-sceptic or existential threat angle to the situation, and Spanish yield spreads to Germany have been crushed back lower in line with the contraction in Italian spreads. The short end of the Italian curve has seen the most significant moves over the last week, with the longer end a bit more reluctant to unwind the discount on Italian debt. It appears the populists have agreed on a new government now which could get Mattarella’s acceptance and move forward.

After this week, we wonder if the EU existential threat will shift quickly to a “slow burn” mode that will stretch on interminably as the populists try to break budget/deficit rules and the EU core finger-waggers protest their intentions – it won’t be pretty.

Today’s event risk of note is the latest May US jobs report as the market has undergone a fairly significant shift in expectations for the June Federal Open Market Committee meeting and beyond. The market’s attempt to interpret the Fed’s focus on “symmetry” have resulted in a net dovish shift, perhaps as the market believes that the Fed is uncomfortable with the current state of expectations. But this may be the wrong spin on the situation as Powell may simply be more interested in shaking the sense that the Fed is “pre-committed” to any course of action to allow a more nimble policy response now that we have reached an important inflection point with inflation.

If this is indeed the case, then the Fed guidance will simply be made less explicit and could mean that each new data release from the US will have a much larger reaction function than we have been accustomed to. What that could mean for today’s release is that strong data could trigger a larger reaction than somewhat weak data.

(Average hourly earnings surprises will merit the most reaction – the expectation today is for another reading of +2.6% year-on-year).

We also have a G7 meeting set for this weekend while Trump is doing his best to make the situation as uncomfortable as possible with new tariff threats against major geopolitical allies ahead of the event. Given his tendency to make threats and retract, the market is showing a diminishing response function to his bluster.

Chart: EURUSD

The EURUSD consolidation rally turned tail ahead of 1.1750 after bottoming at the structurally critical 1.1500 area. The pair may be more sensitive to the USD side of the exchange rate from here on incoming US data now that the immediate EU existential threat seems to be fading. The 200-day moving average will decline to the 1.2000 level in the days/weeks ahead after the 1000-pip sell-off from the highs, but looks too far away to consider now. Rather, the first Fibonacci level up around 1.1910 is a first resistance level of note on a weak USD theme, while a failure of 1.1500-1.1450 points as far south as 1.1200.

EURUSD
Source: Saxo Bank

The G-10 rundown

USD – we suspect the USD will be very reactive to US data after the coming shift in FOMC guidance at the June meeting, which we see as more likely to point to a Fed that wants more flexibility rather than one that is attempting to send an explicitly dovish message.

EUR – EUR may remain in recovery mode for a bit, but the existential threat looks unlikely to fade to the levels achieved ahead of the Italian election early this year. The next ECB meeting has taken on added focus as well from this latest episode.

JPY – the yen lower again on further unwinding of EU existential worries. But if US long yields remain capped, then USDJPY could do so as well. We note that global risk conditions are poor, including in credit and EM, which could continue to drive JPY resilience. 

GBP – sterling struggling here and could continue lower versus both the euro and the USD on negative data and endless Brexit woes.

CHF – EURCHF looking buoyant again, but the chart has suffered a major hit and we adjust expectations or long term potential lower after this latest episode as any serious addressing of EU existential concerns will take years.

AUD – a big week ahead on the Australian event risk calendar with retail sales up Monday, the Reserve Bank of Australia on Tuesday, and Q1 GDP on Wednesday. The AUDUSD chart is stuck in short-term limbo – bears need fresh momentum through 0.7450, while bulls don’t have much of a case unless the pair works up through 0.7600-50.

CAD – a head-spinning couple of session for USDCAD, which melted lower on the Bank of Canada statement (as we pointed out, the timing was difficult as external factors likely aggravated the move), only to erase a large portion of that reaction yesterday as Canadian short rates are right back where they came from after the release of the GDP numbers. A close back above 1.3000 in today’s weekly close could suddenly brighten the outlook again for the bulls.

NZD – 0.7000 is an area for NZDUSD bears to begin taking a stand, though they will feel more comfortable if this latest squeeze is unwound. Also, AUDNZD bulls face a defeat if the last ditch 1.0750 area gives way through the Australia data and central bank calendar next week.

SEK – the krona tried to post a bearish reversal earlier this week- but the tactical status there is unclear after yesterday’s backup. We still prefer the pair lower eventually for a test of 10.00 – lookout for political noise on the weak krona ahead of the September election.  

NOK – we press the snooze button here until something happens to merit attention – 9.46 area range low is the most pivotal chart point for EURNOK.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992