Weekly FX Chartbook: Labor Data Holds the Key to Size of Fed’s Rate Cut Weekly FX Chartbook: Labor Data Holds the Key to Size of Fed’s Rate Cut Weekly FX Chartbook: Labor Data Holds the Key to Size of Fed’s Rate Cut

Weekly FX Chartbook: Labor Data Holds the Key to Size of Fed’s Rate Cut

Macro 7 minutes to read
Charu Chanana

Head of FX Strategy

Key points:

  • USD: Market’s aggressive rate cut pricing sees the labor data test
  • EUR: Range play to remain as September rate cut looks certain, but path ahead still debated
  • JPY: Cash earnings could support the case for more BOJ rate hikes, but urgency unlikely
  • AUD: GDP risks questioning RBA’s hawkish stance
  • CAD: BOC expected to cut rates again this week
  • CNH and CHF: Recent gains could make authorities uneasy

-------------------------------------------------------------------------------------------------------

USD: Sharp Speculator Selling Faces the Labor Market Test

Last week’s Core PCE data came in line with expectations, showing a 0.2% MoM increase in July, which matched both the prior month and the expected figures. The unrounded number eased slightly to 0.1611% from the previous 0.1818%, signaling ongoing disinflation. The YoY Core PCE rose by 2.6%, slightly under the 2.7% forecast. This report reaffirms that disinflation remains on track, offering the Fed room to begin the easing cycle. However, the pace of rate cuts remains uncertain and could hinge more heavily on this week's labor data, especially the upcoming non-farm payrolls (NFP) report due on Friday.

Speculative positioning has shifted to a net short in the week leading up to August 27 (see chart below), but the dollar could find support from geopolitical risks, US election uncertainty and the excessive Fed easing already priced in by the markets. This week’s overload of labor data, including JOLTS, ISMs, ADP, and NFP, will be crucial in breaking the debate between a 25 or 50 bps cut in September. If the data remains robust, a 25bps cut is more likely. However, a weak NFP, particularly if it falls below 130k with another jump higher in unemployment rate, could push the rates market closer to pricing a 50bps cut.

Additionally, Fed’s Williams and Waller are scheduled to speak on Friday, where markets will be looking for any hints on the Fed's thinking regarding the upcoming rate decision.

EUR: September Rate Cut Looks Certain, But Uncertainty Lingers Beyond

Euro-area inflation softened further in the preliminary August report, with the headline figure at 2.2% YoY—the slowest since mid-2021—down from 2.6% in July. Core inflation also eased slightly to 2.8% YoY after three consecutive months at 2.9%. This cooling inflation could give the European Central Bank (ECB) room to cut rates at their upcoming meeting, although hot services inflation continues to make the path after the September meeting look highly uncertain and emphasizing the need for gradual easing.

ECB speakers are also generally hinting at a September rate cut, although some like Schnabel highlighted concerns about stalling service disinflation. Rehn pointed out that falling inflation and weaker growth support a September cut. Kazaks expressed openness to discussing policy easing in September, despite acknowledging sticky services inflation, and Muller indicated growing confidence in a September cut. Villeroy suggested that victory over inflation is within sight, making a September cut "fair and wise," though growth risks remain. Despite this broad consensus, this week’s ECB speakers have shown a more hawkish tilt, with Nagel and Holzmann expressing concerns about inflation, while Villeroy remains more open to a rate cut.

Speculators have responded by adding to long euro positions, pushing net long positioning to the highest levels since January. As the market anticipates further clarity on the ECB’s policy trajectory beyond September, the euro is likely to trade within the 1.08-1.12 range.

CAD: BoC Set to Cut Rates Despite Stronger GDP

The Bank of Canada (BoC) is expected to cut rates by 25 basis points at its meeting on Wednesday. While Q2 GDP growth exceeded expectations at 2.1% annualized (compared to the 1.8% forecast and the central bank's 1.5% projection), the details were less encouraging. Growth was flat month-over-month, with much of the increase driven by population growth and government spending rather than underlying economic strength. Households are feeling the pressure from high interest rates, as evidenced by the slowdown in household spending to just 0.2% in Q2, down from 0.9% in Q1. Government spending, particularly on higher wages, was the primary driver of Q2 growth, surging by 11% annualized. Given these weak underlying details, the BoC is likely to look past the headline GDP strength and proceed with the expected rate cut.

Later this week, the focus will shift to the Canadian employment report on Friday, where the market expects 25,000 jobs to be added. However, the unemployment rate is anticipated to rise to 6.5% from 6.4% in July. From a fundamental perspective, yield differentials continue to point to further CAD weakness. On the technical side also, USDCAD bears appear to be losing momentum as the pair approaches the 1.34 level, with the RSI nearing oversold territory.



-------------------------------------------------------------------------------------------------

The US dollar recouped some of its recent losses as data did not yet support the case for a 50bps Fed rate cut in September. NZD and CAD outperformed in G10 with much easing priced in.
Our FX Scorecard saw bullish momentum in NZD fading but holding up in CAD. Bearish momentum is building in JPY and NOK.
The CFTC positioning data for the week of 27 August saw more USD selling by speculators and net positioning turning to a short for the first time since January. Massive longs added to EUR and short covering in CAD also extended further.

-----------------------------------------------------------------------

Recent FX articles and podcasts:

Recent Macro articles and podcasts:

Weekly FX Chartbooks:

    FX 101 Series:

      

    Quarterly Outlook 2024 Q3

    Sandcastle economics

    01 / 05

    • Macro: Sandcastle economics

      Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

      Read article
    • Bonds: What to do until inflation stabilises

      Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

      Read article
    • Equities: Are we blowing bubbles again

      Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

      Read article
    • FX: Risk-on currencies to surge against havens

      Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

      Read article
    • Commodities: Energy and grains in focus as metals pause

      Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

      Read article

    Disclaimer

    The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

    Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
    Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
    Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

    None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

    Saxo Markets
    88 Market Street
    CapitaSpring #31-01
    Singapore 048948

    Contact Saxo

    Select region

    Singapore
    Singapore

    Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

    The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

    This advertisement has not been reviewed by the Monetary Authority of Singapore.

    Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.