The Return of the Dollar with ADP Nonfarm Stats in Focus

What a difference a speech makes… Two separate intercontinental ballistic missile tests and two very different responses from the U.S president, who continues to catch the markets by surprise despite being 8 months into the first term.

Trump spoke on Monday over the latest North Korean missile test, simply stating that the U.S had all options available, which is certainly a different tact to the fire and fury that had been in response to the previous test aimed at demonstrating capabilities of reaching U.S soil.

Perhaps Trump had been more concerned with Texas than the North Koreans, but the markets took it as a positive, the more reserved response easing market fear of a flare up in tensions between the U.S and China, who has been monitoring events closely and only a few weeks ago issued a warning to the U.S against any first moves against the Kim Jong-Un regime.

The relief was evident through the U.S session on Tuesday and the Asian markets have also been able to brush aside fears of increased geo-political risk in the region, with Asian equity markets on the rebound and the Yen on the slide going into the European session, the Dollar up 0.34% at ¥110.08 at the time of the report. It would be the first time that the Dollar closes at ¥110 levels since mid-August, assuming it doesn’t give up the risk on sentiment gains through the U.S session.

Its nonfarm payroll week and this afternoons stats out of the U.S include August’s ADP nonfarm employment change figures and 2^nd estimate, 2^nd quarter GDP numbers. We would expect the ADP numbers to be of greater influence under normal conditions, with the nonfarm payroll figures essentially forward indicators for the U.S economy, but with June retail sales figures having been revised upwards at the time of the release of the July retail sales numbers, there could be a better than forecasted GDP figure that would reverse some of the negative sentiment towards the Dollar, following the disappointments over the 1^st estimates.

We will expect the markets to pay more attention to the stats and the possible impact the numbers may have on the outlook towards monetary policy this week. For the Dollar to continue on its current road to recovery, not only will the GDP numbers need to be positive, but the both July’s nonfarm employment change figures will need to see minimal downward revision, coupled with an increase in the August nonfarm payrolls.

While the markets will respond to the ADP stats, as we have seen on many occasion previously, the main event is on Friday, with the government figures key and any upside in the Dollar driven by the ADP stat may ease ahead of Friday’s data and then there is also the inflation numbers due out tomorrow to also consider.

At the time of the report, the Dollar Spot Index was up 0.29% at 92.521, with the Dollar likely to be on the front foot ahead of this afternoon’s numbers.

It’s relatively quiet across the Pond, with no material stats scheduled for release out of the UK, leaving the Pound at the mercy of the Greenback, cable down 0.09% at $1.2906 at the time of the report. It’s going to be a tough week for the Pound, particularly if the Dollar manages to claw its way back from the abyss and stats out of the U.S begin to impress on the FED and the markets to reconsider the currently dovish outlook towards a final rate hike by year end.

Across the Channel, its August prelim inflation figures out of Germany this afternoon, with headline inflation forecasted to ease, following this morning’s numbers out of Spain, where core inflation picked up, whilst headline inflation softened. Core inflation is the area of focus, but with the EUR already having touched $1.20 levels, expectations are for Draghi to be a drag on the EUR over the near-term, the EUR down 0.23% at $1.1945 at the time of the report, with more losses to come should the U.S numbers provide some relief to the Dollar bulls.