Dollar steady as traders brace for labour data deluge

British Pound

Reuters: Sterling dropped against the euro but was still within striking distance of a one-month high, while rising versus a weakening dollar. The greenback eased but remained close to its highest level in almost two weeks as investors focused on a U.S. jobs report due at the end of this week. British factories had their strongest month in more than two years in August as demand at home offset a fall in exports, according to a survey published on Monday. Improving economic data and the cautious tone struck by Bank of England Governor Andrew Bailey last week regarding further rate cuts has supported the pound.

The euro rose 0.18% against the pound to 84.26 pence per euro, after hitting on Friday 83.98, its lowest level since July 25. Sterling was marginally up versus the dollar to $1.3132. Analysts flagged that Britain, in the last eight months, saw a more robust growth picture with the economy shaking off a shallow recession, a new government which ensured fiscal sustainability, while the Monetary Policy Committee of the Bank of England began to dial down restrictive policy.

Still, they have slight different views about the British rate outlook. "Our economists expect one more 25 basis points cut from the BoE this year at the November MPC meeting," said Emmanouil Karimalis, rate strategist at UBS. "However, a cut in September should not be entirely ruled out, as data have improved since the August MPC, and the Fed is poised to cut rates for the first time in this cycle," he added. The September MPC meeting is scheduled for September 21, one day after the Federal Reserve rate decision.

"Finance minister Rachel Reeves' commitment to demonstrating fiscal sustainability has been seen constructively by markets, though inasmuch as union wage costs have accelerated and utility bills are rising once more," said Mark Dowding, BlueBay CIO, RBC BlueBay Asset Management. "Rising inflation creates a difficult backdrop for the Bank of England to reduce interest rates much over the months ahead," he added.

US Dollar

Reuters: The dollar held close to a two-week high against the yen and the euro on Tuesday as investors geared up for a slew of economic data, including Friday's U.S. payrolls, that will influence the size of an expected interest rate cut from the Federal Reserve. The euro was last at $1.1060, not far from the two week low of $1.1042 it touched in the previous session, while the yen fetched 147.10 per dollar in early trading, close to the two-week low of 147.16 hit on Monday.

Investor focus this week will squarely be on the U.S. payrolls data due on Friday after Fed Chair Jerome Powell last month endorsed an imminent start to interest rate cuts in a nod to the worries over the labour market. Ahead of that job openings data on Wednesday along with jobless claims report on Thursday will be in the spotlight. Markets are pricing in a 69% chance of a 25 basis points cut when the Fed meets Sept. 17-18, with 31% probability of a 50 bps cut, CME FedWatch tool showed.

This week’s overload of labour data will be crucial in breaking the debate between a 25 or 50 bps cut in September, said Charu Chanana, head of currency strategy at Saxo. "If the data remains robust, a 25 bps cut is more likely. However, a weak non-farm payrolls, particularly if it falls below 130k with another jump higher in unemployment rate, could push the rates market closer to pricing a 50 bps cut" Economists surveyed by Reuters expect the addition of 165,000 U.S. jobs in August, up from an increase of 114,000 in the previous month.

The dollar index, which measures the U.S. currency against six rivals, was at 101.69 in early trading, just below the two-week high of 101.79 it touched on Monday. The index fell 2.2% in August on expectations of U.S. rate cuts. Sterling eased a bit to $1.31425 in early trading. The Australian dollar was 0.14% lower at $0.6782, while the New Zealand dollar fell 0.18% to $0.6223.

South African Rand

Reuters: The South African rand was steady on Monday ahead of the release of second-quarter gross domestic product data. At 1506 GMT, the rand traded at 17.86 per dollar, near its previous close of 17.85. Domestic investors will focus on the country's second-quarter GDP figures due at 0930 GMT on Tuesday for signs on the health of Africa's biggest economy. Earlier in the day, a Purchasing Managers' Index survey showed South African manufacturing activity slumped in August, pointing to highly volatile business conditions.

On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed 0.33% lower. South Africa's benchmark 2030 government bond was weaker, with the yield climbing 2.5 basis points to 9.225%.

Global Markets

Reuters: Bond yields drifted higher on Tuesday, while currencies and Asia's stock markets steadied as investors waited on a raft of data to determine how deeply the U.S. can cut interest rates. Ten-year Treasury yields were slightly higher at 3.919% and two-year yields rose a basis point to 3.935% as trade resumed in Asia following a U.S. holiday overnight. Upbeat spending figures on Friday led markets to trim the chance of a half-point easing from the Federal Reserve. The U.S. ISM manufacturing survey due later in the day and particularly jobs data due on Friday will be crucial for the Fed's decision.

MSCI's broadest index of Asia-Pacific shares outside Japan ticked 0.1% lower. Japan's Nikkei rose 0.7% and S&P 500 futures were flat. The dollar has steadied along with U.S. yields as focus turns to Friday. "It really boils down to Friday's number," said Raisah Rasid, global market strategist at J.P. Morgan Asset Management in Singapore, with policymakers looking for a cooling labour market to clear the way for rate cuts. "We don't see any stress or indications that would necessitate a 50 basis point cut the question is how long will risk assets continue to rally?"

Economists forecast the ISM survey improving but remaining in contractionary territory at 47.5 in August. "I am not so sure the dollar will take too kindly to a weaker read," said Pepperstone analyst Chris Weston. "A number closer to 50 would likely compel dollar shorts to cover." On Friday analysts are looking for a rise of 160,000 in jobs and a dip in the unemployment rate to 4.2%. The dollar was firm at 146.85 yen and traded at $1.1063 per euro in the Asia session. Rallies in the Australian and New Zealand dollars paused for breath, with the Aussie held just below $0.68.

In Hong Kong, shares in property company New World Development slumped to a two-decade low after the company estimated a $2.6 billion loss for the year to June. In Australia, Woolworths shares fell 3% a day after the supermarket operator said it would sell its remaining stake in a chain of liquor shops. Gold hovered at $2,494 an ounce after hitting a record high above $2,500 in August. Oil prices have struggled for traction as demand worries weigh against tension in the Middle East and Brent crude futures slipped 0.5% to $77.13 a barrel.

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