US recap: Dollar down pre-payrolls and on doubts Fed hawks will hold

Aug 4 (Reuters) – EUR/USD rebounded from the Tuesday-Wednesday pullback that was driven largely by hawkish Fed remarks, as markets shrugged off those comments and got back to pricing in Fed rate cuts next year, following dismal inflation and recession projections by the BoE and ahead of Friday’s key U.S. employment report.

Treasury yields and the dollar strengthened after the last two non-farm payrolls reports, but the sharp deceleration in jobs growth since February’s 714k post-Omicron peak is forecast to make a subsequent low of 250k in July versus 372k in June.

While a 250k print would still be historically healthy, the concern is that further tightening of financial conditions and negative real wage growth will eventually weaken the economy enough to slow Fed rate hikes.

Cleveland Fed President Loretta Mester Thursday allowed that recession risks have gone up, but several months of retreating inflation is needed before a Fed rethink, with firms still struggling to find workers.

The broader negative growth outlook appeared more plausible after the BoE followed its biggest rate hike since 1995 with grueling projections for inflation soaring the 13.1% in October and the likelihood of a recession lasting 5 quarters.

Sterling initially spiked up to 1.2220 on the BoE seemingly digging in to fight inflation, but then slid to 1.2065, as gilt yields tumbled at the prospect of recession and eventual BoE easing, only to rebound with a broader dollar slide ahead of Friday’s jobs report and fresh upticks in initial and continuing jobless claims nU8N1A4002. There was some disappointment at the slower-than-expected BoE’s QE reduction plan.

EUR/USD was up 0.73% and closer to the top of its ongoing consolidation range, with Friday’s jobs report seen presenting binary risks, and perhaps the impetus to either resume the pandemic downtrend or extend the bullish reversal following the fleeting break below parity.

Sterling gaine 0.14% after this morning’s wild swings, with prices using the 30-day moving average as support and the 55-DMA as resistance, but with prices still tucked in below the falling daily cloud.

USD/JPY fell 0.58%, weighed down by the drop in Treasury yields and broader demand for the haven yen amid heightened geopolitical risks from China’s military response to U.S. House Speaker Pelosi’s visit to Taiwan.

Unless Friday’s U.S. jobs report can revive the uptrend in Treasury yields and reverse the recessionary yield curve inversion, this week’s USD/JPY rebound will look corrective rather than the resumption of the rampant pandemic recovery trend.

Plunging oil prices weighed on the dollar and saw Brent trade down to pre-Ukraine invasion levels as growing concerns about global growth and slowing demand weighed on prices and sizeable speculative longs.

Bitcoin and ether were both modestly lower in line with U.S. equities.

As noted earlier, U.S. employment data top Friday’s event risk list. Payrolls are forecast at 250k vs 372k prev. The jobless rate is seen steady at 3.6% and average hourly earnings are expected up 0.3% m/m and 4.9% y/y vs 0.3% and 5.1% previously. The workweek (GDP feeder) is also seen steady at 34.5 hours.

(Editing by Terence Gabriel; Randolph Donney is a Reuters market analyst. The views expressed are his own.)