Nonfarm Payrolls and Wage Growth to Drive the Dollar

There seemed to be an element of surprise on Thursday afternoon, when U.S Treasury Secretary Mnuchin spoke of an acceptance to the weaker Dollar noting that, while the Dollar was likely to recover in the weeks ahead off the back of stronger economic fundamentals, the weakness was somewhat better for the U.S on trade.

It wasn’t long ago that the U.S administration had frowned upon governments and central banks jawboning and attempting to keep their respective currencies on the weaker side in the interest of trade and economic growth, the ECB, China and Japan having been the main culprits singled out.

Thursday’s comments pegged back the Dollar, which had been in recovery mode following Wednesday’s upbeat economic and nonfarm payroll figures, with Thursday’s inflation figures in line with expectations.

With the U.S beginning to jawbone the Dollar, President Trump having been an advocate of a weaker Dollar from the start, a currency war certainly looks to be on the cards, when considering the fragilities of export driven economies to currency strength.

We have already seen central banks step back from hawkish commentary, following the FED’s shift to the more dovish side, though central banks may need to do more than go into silent mode should Dollar weakness persist and it would be interesting to see how the U.S President responds to any evidence of currency manipulation, the threat of trade tariffs the most likely response.

While the Dollar weakened on Treasury Secretary Mnuchin’s comments, the good news was the positive outlook towards the U.S economy, with Wednesday’s revised GDP numbers for the 2^nd quarter and upbeat retail sales figures for July suggesting that momentum will likely continue through the 3^rd quarter.

Mnuchin’s outlook on the Dollar may be somewhat askew however, with the Dollar having struggled through the year more off the back of a negative outlook on inflation and the inability of the U.S administration to deliver on growth policies than the U.S economy itself.

Looking at the day ahead, the markets will be positioning ahead of this afternoon’s nonfarm payroll and wage growth numbers for August and, while nonfarm payrolls will need to deliver, with the markets looking for upward revisions to July numbers, it’s going to boil down to wage growth.

If forecasts are anything to go by, it’s going to be Dollar negative this afternoon, with softer wage growth coupled with Thursday’s softer inflation numbers likely to lead the markets to further price out a rate hike by the end of the year.

FED Chair Yellen chose to remain silent last Friday ahead of this week’s heavy stats and perhaps wisely so, with gains in the Dollar going into the European session attributed more to the general upbeat sentiment towards the U.S economy than what lies ahead this afternoon.

Other data out of the U.S this afternoon include finalized Michigan Consumer Sentiment figures for August and manufacturing PMI numbers, though we will expect these to be a secondary consideration for the markets.

Across the Pond, stats are limited to manufacturing PMI numbers out of the UK, which could see the Pound take a hit, should the numbers disappoint, with finalized PMI numbers scheduled for release out of the Eurozone also a factor to consider, though by today’s close, U.S wage growth will ultimately decide the fate of respective pairings.

At the time of the report, the Dollar Spot Index was up 0.14% at 92.799, with the EUR down 0.18% at $1.1888 and the Pound down 0.11% at $1.1916, the Pound already under pressure following Thursday’s lack of progress on core issues in relation to Brexit, including the financial settlement amount that the EU has called for on the Britain leaving the EU.