Talking Points

  • U.S. Dollar: NFP's Top Forecast, All Eyes On FOMC
  • Euro: Outlook Remains Bearish, EU Looks To Expand Bailout Fund
  • British Pound: To Consolidate Further Ahead Of Quarterly Inflation Report

The U.S. dollar regained its footing as the employment report for the world's largest economy topped market forecast, but the market reaction was certainly short-lived as the data sparked a rebound in risk appetite. The 117K rise in non-farm payrolls certainly exceeded forecasts for an 85K rise, but we saw the unemployment rate to fall back to an annualized 9.1% from 9.2% in June as discouraged workers continue to leave the labor force. Nevertheless the rise in job creation paired with the faster pace of wage growth encourages an improved outlook for private sector consumption, and we may see economic activity gather pace throughout the remainder of the year as the Fed expects to see a faster recovery in the coming months.

With the Federal Reserve Open Market Committee scheduled to hold its policy meeting next week, the central bank may strike an improved outlook for the region in light of the recent developments, and Chairman Ben Bernanke may continue to talk down speculation for another round of quantitative easing as growth and inflation picks up. At the same time, the Fed may show an increased willingness to wind down its balance sheet further, and the central bank may toughen its stance against inflation as we see price pressures feeding into the real economy. As the Fed adopts a different strategy compared to its major counterparts, we should see the committee scale back its asset purchase before eventually raising borrowing costs off of the record-low, but interest rate expectations may start having a greater influence in dictating price action for the reserve currency as investors weigh the outlook for future policy. The relief rally in the greenback certainly appears to be tapering off, and the USD may struggle to hold its ground throughout the North American trade as risk appetite appears to be feeding into the currency market.

Meanwhile, the EUR/USD advanced to a high of 1.4230, but the near-term outlook for the single-currency remains fairly bearish as European policy makers maintain a cautious outlook for the region. Following the less hawkish statement from the European Central Bank, European Commissioner for Economic and Financial Affairs Olli Rehn said the bailout fund should be widened and reinforced in light of the heightening risk for contagion, and the Governing Council may continue to show an increased willingness to carry its nonstandard measures into the following year as the sovereign debt crisis bears down on the economic outlook. As the EUR/USD trades within a bearish pattern, the rebound in the exchange rate could be short-lived, and the descending triangle may continue to pan over the near-term as interest rate expectations falter. In turn, we still see a risk of the euro-dollar threatening the rebound 1.3836, and the single-currency may face additional headwinds later this year as the region faces a slowing recovery.

The British Pound pared the overnight decline to 1.6229 and the sterling looks poised to trend sideways going into the following week as market participants turn their attention to the Bank of England quarter inflation report due out on August 10. Given the recent data out of the U.K., we may see the central bank curb its outlook for growth and inflation, and Governor Mervyn King could endorse a wait-and-see approach for the remainder of the year as policy makers see a risk of undershooting the 2% target for inflation. Until then, we may see the GBP/USD maintain the broad range from earlier this week, and the report is likely to heavily influence future price action for the sterling given the batch of mixed views within the central bank. As the inflation report precedes the BoE minutes, which are due out on August 17, we may see a fairly muted reaction to the policy statement, but a shift in the vote count could spark increased volatility in the exchange rate as the committee struggles to meet on common ground.