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Demand for USD rebounds after upbeat jobs data

USD - United States Dollar

Demand for the US dollar versus the euro picked up today after last week’s strong employment data.

On Friday the US dollar rallied on the back of an upbeat July nonfarm payrolls report. The US added 943K new jobs in July, while the unemployment rate dropped sharply from 5.9% to 5.4% and wage growth was stronger than expected, both largely beating the market’s expectations. The participation rate increased to 61.7% while broader measures of the labor market also improved, with the underemployment rate falling 0.6%, to a new post-COVID low of 9.2%. The market took this reading as the US economy coming out of the pandemic in very good shape. With it, the US dollar was a benefactor, strengthening by over 0.9% versus the euro over the week, while US stocks and US treasury yields were both on the front foot.

Federal Reserve vice chair, Richard Clarida, also stated last week that ‘progress’ had been made towards the US Federal Reserve’s goals of full employment and 2% average inflation, indicating that the economy was moving towards the thresholds that would warrant an adjustment to the central bank’s bond-buying program, with an interest rate increase expected for 2023. This is a push forward from the previous 2024 expectation, and thus the US dollar continued to benefit versus its G10 peers. In fact, it was the standout performer versus every single G10 currency last week.

The key release this week is the CPI report on Wednesday, which is expected to show some moderation in inflation pressures from previous months. The market will also be listening closely to the four Fed officials who are speaking this week, for any guidance on the possible timing for tapering in light of the upside surprise to payrolls.

Key Movers

The Bank of England's comments last week provided the rocket that sterling needed, with the currency driven by comments that the UK's central bank could look to increase interest rates and ease its policy around quantitative easing sooner than expected. Thursday sees the release of UK GDP, which will be watched closely for signs of economic growth as we come out of the pandemic. A weak GDP figure could halt sterling in its tracks, losing the momentum it has gained in recent weeks. GBPUSD was up 0.01%, trading around 1.3873 at the time of writing.

Last week we saw the AUDUSD reach a mid-week high of 0.7426 but failed to retain the 0.7400 levels. On Friday the Reserve Bank of Australia published the minutes of its latest monetary policy meeting, which repeated that the board remains committed to maintaining financial support and that a rate hike would not be likely until 2024. This is despite rising risks to the local economy amid persistent lockdowns to tame the spread of COVID-19. A return to school and to work was announced on Friday for Greater Sydney residents if New South Wales can hit a total of 6 million doses of Covid-19 vaccinations by August 28. The Aussie dollar still remains vulnerable in the coming week, with COVID-19 Delta variant cases still on the rise, threatening isolated lockdowns or various restrictions.

Expected Ranges

EUR/USD: 1.1745 - 1.1767 ▲

GBP/USD: 1.3855 - 1.389 ▲

AUD/USD: 0.7332 - 0.7363 ▲

USD/CAD: 1.2536 - 1.2581 ▲