USD loses ground amid disappointing wage growth
The US dollar continued to lose ground on Monday after mixed economic data and escalating trade tensions. Investors reacted strongly to the last job report as they put the trade war story on the backburner. Despite the fact that the US economy added more private jobs than expected (213k versus 195k expected), the dollar fell sharply following the announcement. The unemployment rate ticked up to 4% (from 3.8% in May) amid an increased number of job seeker. However, it looks like market participants chose to focus on the lack of positive pressure on wage. Indeed, wage growth is the only missing piece of the full employment puzzle. Average weekly earnings increased only 2.7% (versus 2.8% expected), which means that on an inflation adjusted basis wage growth would stall if not contract in June (headline inflation rose 2.8%y/y in May and is expected to have increased 2.9% in June – thanks to rising oil prices).
In anticipation of weaker inflation pressure, investors adjusted their rate hike expectations to the downside. According to the Overnight Index Swap, the probability of a September rate hike has eased to 73%, from 84% a couple of days ago. Although this is a marginal decrease, it summarized the overall sentiment in the market. Equities reacted positively to the perspective of a less abrupt rate path in the US.
The greenback fell the across the board this morning. EUR/USD rose 0.22% to 1.1775, the Aussie reached $0.7465 (up 0.50% on the session), while USD/CHF fell 0.22% to 0.9872. However, we are still trading within a monthly range. The trade war will prevent a massive USD sell-off as investors will maintain a cautious approach.
Uncertainties around Brexit negotiations weigh on British pound
Eight months before the UK leaves the EU, it appears that the British government is facing a difficult task. After convincing Ministers on Friday concerning her Brexit plan, Prime Minister May is facing an additional challenge.
Indeed, British Brexit Secretary and leader of the negotiations David Davis announced his resignation, commenting the agreement as “weak and impracticable”, adding that he remains a “reluctant conscript” of the matter, a rather less-than-encouraging situation for May which needs to reorganize her Brexit Ministry.
Since the announcement, certainties as to UK’s capabilities to further support the development of a hard Brexit is weak, thus supporting the idea of a softer Brexit, in which the UK would remain in the customs union with the EU.
GBP/USD is bouncing off following recent decrease right after the announcement in spite of the positive impact that would a maintenance of customs union have on the UK economy and lower wage growth in the US. Currently trading at 1.3345, the GBP/USD pair is rising further, approaching the 1.3370 range (13/06/2018 high).
Swiss unemployment rate maintained at 10-year low
The Swiss economy remains in shape according to the Federal Statistic Office (SECO). Written at 2.40% in June (seasonally adjusted: 2.60%), a level not seen since September 2008, the Swiss economy remains in full employment, despite a slowdown in inflation and a reduction of domestic consumption in May, amid a strong reduction in unemployment registration by -20.20% compared to the same month the year before.
With exports maintained at a neutral rate and imports at +3.10% in May, coupled with soft KOF sentiment data for the month of June at 101.70 (prior: 100), the Swiss economy remains on track with current growth expectations at 2% for 2018.
Currently given at 0.9868 and unable to break hourly resistance at 0.9909 (08/07/2018 high), the pair is expected to decrease further, approaching the 0.9860 range.
