USD Surges on NFP, EUR/USD and JPY Face Pressures, Eyes on Super Wednesday.

Welcome to this week's edition of our newsletter. The currency markets experienced notable volatility, with the U.S. Dollar staging a late-week rally following a surprisingly robust Non-Farm Payrolls (NFP) report. Earlier in the week, weaker labor market data had fueled speculation about potential rate cuts by the Federal Reserve. Meanwhile, the Euro and Yen faced downward pressure due to political uncertainties and economic data. As we look ahead, “Super Wednesday” will be pivotal, featuring crucial U.S. inflation figures, the Federal Reserve's interest rate decision, and Fed Chair Jerome Powell's press conference.

USD

The U.S. Dollar experienced a rollercoaster week, starting off weak but surging on Friday due to a surprising Non-Farm Payrolls (NFP) report that pushed it back into positive territory. Earlier in the week, weaker-than-expected U.S. labor market data (including the ADP report, JOLTs, and weekly claims) had fueled speculation about potential rate cuts by the Federal Reserve as early as September. Both U.S. Treasury yields and the Dollar saw significant declines early in the week but reversed sharply on Friday following the robust NFP data, which reported an addition of 272,000 jobs in May.

Looking ahead, the upcoming “Super Wednesday” will be crucial, with key events including the release of U.S. inflation figures, the Fed’s interest rate decision, the updated “dot plot,” and a press conference by Fed Chair Jerome Powell.

EUR/USD

The EUR/USD pair faced continued selling pressure, dropping to a three-week low during the Asian session on Monday. Spot prices hovered around the 1.0775 level, appearing vulnerable to further declines, especially if they breach the 100-day Simple Moving Average (SMA). The U.S. Labor Department's monthly employment report showed that the economy added 272,000 jobs in May, surpassing the expected 185,000 and the previous month’s revised figure of 175,000. Average Hourly Earnings grew by 4.1% year-on-year through May, despite a slight increase in the unemployment rate to 4.0%.

This strong employment data has prompted investors to reassess their expectations of a Federal Reserve rate cut in September, keeping U.S. Treasury yields elevated and supporting the safe-haven U.S. Dollar. Political uncertainty in the Eurozone, driven by French President Emmanuel Macron's call for snap elections, also weighed on the Euro. As a result, the EUR/USD pair is likely to continue its downward trend, with traders possibly holding off on aggressive bets until after the Federal Open Market Committee (FOMC) policy decision on Wednesday. Upcoming U.S. consumer inflation data will also be pivotal in driving the USD and influencing market momentum.

GBP/USD

The GBP/USD pair regained some ground, trading around 1.2725 during early Asian hours on Monday. However, the upside for GBP/USD might be limited due to reduced expectations of U.S. Federal Reserve rate cuts this year, following stronger-than-expected U.S. Nonfarm Payrolls (NFP) data. Investors are focused on the UK employment data for May, due on Tuesday, alongside U.S. Consumer Price Index (CPI) figures and the Federal Reserve’s interest rate decision. Additionally, the U.S. Producer Price Index (PPI) data will be closely monitored as Fed policymakers speak post-blackout period. Key economic indicators to watch this week include the UK Consumer Inflation Expectations and the U.S. Michigan Consumer Sentiment data on Friday, which will offer fresh insights into central banks’ policy outlooks.

JPY

The Japanese Yen (JPY) weakened for the second consecutive trading day on Monday. The USD/JPY pair found support as the U.S. Dollar regained strength following strong U.S. employment data. Japan’s GDP contracted by 1.8% annually in the first quarter, slightly better than the expected 1.9% decline. The quarter-on-quarter GDP also shrank by 0.5%, in line with previous data. Japan’s 10-year government bond yield rose above 1.01% ahead of the Bank of Japan’s policy meeting on Friday, where the central bank is expected to maintain its current interest rates.

Reports suggest that the Federal Reserve may cut rates in September and December, likely due to economic slowdown rather than inflation control, potentially leading to a mild recession later this year. Japanese Finance Minister Shunichi Suzuki indicated readiness to act against excessive currency volatility and emphasized the importance of market trust in public finances. Japan's foreign reserves dropped to $1,231 billion in May, the lowest since February 2023, due to currency intervention operations. Bank of Japan Governor Kazuo Ueda mentioned that inflation expectations are rising but have not yet reached 2%, signaling a cautious approach to exiting monetary stimulus.

As we conclude this week’s newsletter, the currency markets are poised for significant moves driven by upcoming key economic indicators and central bank decisions. The U.S. Dollar’s strength hinges on the forthcoming U.S. inflation data and the Federal Reserve’s policy updates. The Euro remains under pressure amidst Eurozone political uncertainties, while the Japanese Yen’s trajectory will depend on the Bank of Japan’s stance. Stay tuned for our next edition as we continue to navigate these dynamic markets and provide you with the latest insights and analyses. Thank you for reading.

The weekly market update is published every Monday. If missed due to unforeseen circumstances, it will be posted the following day.

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