Big shifts in Fed expectations ahead of payrolls data

John Hardy

Head of FX Strategy, Saxo Bank Group
John Hardy joined Saxo in 2002 and has been Head of FX Strategy since October 2007. He focuses on delivering strategies and analyses in the currency market as defined by fundamentals, changes in macroeconomic themes, and technical developments.

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.


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.

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.

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