Soft data clips dollar ahead of Jackson Hole

GBP: Short term rates remain the key driver

Yesterday's price action in GBP/EUR was telling. GBP/EUR traded at €1.1760 on the soft Eurozone PMI releases only to go back to €1.1675 from the soft UK services PMI release. The soft UK data took a large 15bp out of pricing for the Bank of England (BoE) tightening cycle. ING believe that the BoE will not deliver on the 60bp of tightening still priced by the markets and that GBP/EUR can later this year move back to the €1.1494 area. The only UK data of note today is the August CBI retail sales numbers and we suspect GBP/EUR continues to trade at the €1.1695-1.1760 range, while Cable is quite steady near $1.2700 too.

No major data.

EUR: Pessimism reigns

Yesterday's worrying release of flash PMIs for August certainly made their mark on markets. The EUR/USD test of the 200-day moving average at $1.0800 yesterday looked fully justified and were it not for those US payroll revisions, EUR/USD would be trading much closer to $1.0800 this European morning. We have not heard much from ECB speakers recently (President Christine Lagarde will speak late tomorrow), but markets are quickly losing confidence that the central bank will be able to squeeze in another rate hike before the drop in Eurozone activity closes the door on the tightening cycle. This is certainly frustrating the case for EUR/USD to be making it quickly back above $1.10. The clear near-term range for EUR/USD looks to be $1.0800-1.0930. Despite today's slightly better risk environment, we doubt investors will want to chase EUR/USD too much higher and unless there is a sharp spike higher in US initial jobless claims today, EUR/USD may well end up gravitating back towards $1.0800.

No major data.

USD: Focus on the jobs market

The Dollar and US yields were knocked off their highs yesterday as an annual benchmark revision (up to March 2023) deducted 306,000 from the reported US payroll growth figures. Several expectations had in fact looked for a 500,000 reduction. The market reaction (a 10bp drop in the US yield curve) looked a little exaggerated but perhaps proves a reminder that the employment story is the most important US variable right now. In other words, US disinflation is welcome, but if the unemployment rate remains at its lows and consumption stays strong, inflation may never make it back to 2% on a sustainable basis. For that reason, look out for the weekly initial jobless claims data today, where any tick higher to the 250,000 area could slightly weigh on US yields and the Dollar. We would not expect big moves, however, before Federal Reserve Chair Jerome Powell's speech tomorrow at the Fed's Jackson Hole symposium.

Data:

13.30: Continuing & Initial Jobless Claims

15.00: Jackson Hole Symposium begins