Global indices, commodity dollars, and some emerging market currencies have seen a robust rebound this week, driven by a decrease in US bond yields. Investors are reconsidering the timing and selection of the central bank to initiate interest rate cuts again, shifting away from the Federal Reserve’s “higher-for-longer” narrative. This reassessment has been bolstered by recent Nonfarm Payroll (NFP) data suggesting a soft landing, which reduces the likelihood of a December Fed rate hike threatening the bond market rally.
The Eurozone’s consistent underperformance has constrained the pair’s ability to benefit from peak Fed interest rates, due to the European Central Bank’s no-hike signal. On the other hand, a positive risk tone and an anticipated rate hike by the Reserve Bank of Australia next week have supported the Australian dollar’s recovery, aligning with the Fed’s pause in rate hikes. If the “higher-for-longer” narrative continues to fade, may become more appealing than EUR/USD. Conversely, if US economic resilience persists, shorting EUR/USD might outweigh AUD/USD downside.
Today’s US jobs data will be pivotal in determining near-term bond yield direction, impacting markets such as EUR/USD, AUD/USD, and gold. The October nonfarm payrolls report is forecasted around +180K, with potential revisions to last month’s +336K figure being significant. Wage growth of +0.3% month-on-month could reduce the year-on-year rate to 4.0%, while the unemployment rate is expected to remain steady at 3.8%.
Later today, the release of ISM services PMI data could influence the dollar if it significantly deviates from expectations. The PMI is expected to hover around last month’s 53.6. Next week’s highlight in US data is Friday’s release of UoM Consumer Sentiment data.
The October jobs report, featuring 150,000 new jobs, steers clear of a negative NFP headline and provides further evidence for a data softening scenario. This counters the Federal Open Market Committee board hawks’ advocacy for a December rate hike. The October payroll figures, along with upcoming inflation updates and various other indicators for the forthcoming policy meeting, reinforce the market’s belief that the Fed’s tightening cycle has ended, potentially boosting bond, currency, and stock markets.
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