USD Sell Off Deepens Following Weaker Core PCE – US Labour Reports On Watch Today

The US Dollar has turned sharply lower into the back end of the week. Following on from dovish comments by Fed’s Powell on Wednesday, a softer core PCE reading yesterday has helped further cement the chances of a smaller rate hike from the Fed in December. With markets now pricing in a roughly 80% chance of a smaller 50bps hike, it would likely take a meaningful upside surprise in today’s employment readings to help stem the tide of USD sales.

In terms of figures then, the market is looking for the headline NFP to print 200k, down from 261k prior with average hourly earnings to drop to 0.3% from 0.4% prior. The unemployment rate is expected to stay at 3.7%. Earnings will likely be the most watched component today as traders look to see whether inflationary pressures cooled this month ahead of the CPI reading we get just in front of the December FOMC.

Key Factors for Today

• USD fell sharply yesterday as a softer core PCE reading added to the dovish expectations ahead of the December FOMC
• US labour reports in focus today
• Mixed action in equities – broader econ fears hurting sentiment
• JPY remains the best performer – ECB’s Lagarde stokes hawkish ECB expectations again
• Metals break out on USD weakness – oil rises but tempered by econ concerns

Coming Up

• USD – NFP, Hourly earnings, unemployment rate,
• CAD – Unemployment rate

Mixed Action in Equities Despite Softer USD

Equities markets saw a mixed session yesterday. Despite weakness in USD, many indices struggled to make gains as broader economic concerns took hold and uncertainty around events in China continued to haunt investors. US manufacturing data was seen dropping to its lowest level since the pandemic began yesterday, highlighting the difficulty facing many companies in the US. In Europe, hawkish ECB expectations as well as renewed concerns over European energy inventories weakened investor sentiment. The FTSE has reversed also following a strong run over recent weeks and is now back below the august highs.

JPY Continues To Strengthen as USD Falls

In FX, JPY takes the lead again today. Yen has strengthened considerably this week amidst the sweeping risk aversion we’ve seen into the end of the week despite a softer USD. USDJPY is now down over 11% from the YTD highs and looks vulnerable to further losses should today’s US labour readings endorse the bearish USD/Dovish Fed narrative. We also have Canadian employment data which will be key to watch ahead of next week’s BOC meeting.

ECB’s Lagarde Stresses Need For ECB Action

ECB’s Lagarde kept hawkish ECB expectations alive with comments made earlier today. Lagarde reaffirmed the banks’ commitment (as well as the need) to return inflation to target. This comes on the back of comments earlier in the week warning that inflation has not yet peaked, and is keeping the market’s expectations skewed towards a further large 75bps hike in December.

Metals & Oil Benefit from USD Decline

In the metals and commodities space, both gold and silver traded higher yesterday, benefiting from weakness in the Dollar. Gold prices broke out to their highest level since August, though are still capped by the August highs for now while silver prices broke out to their highest level since May. Crude prices were higher yesterday but were seen surrendering some of the day's gains as weaker US manufacturing data took the shine off the rally. Traders now look ahead to the upcoming OPEC meeting this weekend which might provide a fresh wave of volatility if any surprises are seen.