Markets had placed their bets on a low volatility summer period and so far at least, across the broader market this has largely been delivered. Key FX pairs have stayed within recent ranges and channels with volatility still realising below or in line with the record low implied volatility that markets had priced in over this period. Despite the worldwide spread of variants of concern, notably the Delta variant and widespread fear over the potential consequences for global economic growth, markets have been relatively stable. Having said that, one variable that has been able to move markets recently has been data. In the case of the US Dollar, the role of data has been the key to understanding the Federal Reserve’s impact upon the currency market. Frequently, however, that data is conflicting with itself and creating retracement patterns within the world’s largest currency.
When the Federal Reserve Chairman Jay Powell placed the performance of the labour market as the final frontier standing in the way of tightening US policy, unemployment, employment and wage statistic release dates all became focal points for the market. Even the simple comment that the Fed Chair would want to see ‘strong jobs numbers’ before voting to tighten policy prompted the market to evaluate the fragile and often slow-to-react state of the labour market. Given that those evaluations were somewhat bleak, what with fiscal support still in place to offset the risks to employment created by the pandemic and global growth concerns, interest rate expectations were necessarily downgraded with a knock on effect in EURUSD. This allowed the Dollar to retreat back towards 1.19 versus the Euro in late July.
With all eyes on the labour market, last week’s US data releases carried more significant weight and attracted more attention than usual. First, a private employment survey, the ADP National Employment Report was released last Wednesday. This report had been expected to show an increase of just shy of 700 thousand jobs within the US economy in the month of July. Surprise, surprise: it didn’t. The survey read that frictions in the labour market had meant that only 330,000 jobs were added in this period in another set back to the timeframe for the monetary normalisation that the US Dollar needs to derive additional strength. On another low volatility day, this allowed the market to orientate itself short of USD and for the greenback to weaken. Markets were cautious given that ADP data is not its, nor the Fed’s, principal gauge of employment and the recent symmetry between ADP data and such preferred measures has been weak. A slow and steady decline in EURUSD to exactly 1.19 was quick to break formation when Fed Vice Clarida spoke later that day.
The decoupling of the ADP report from the more closely watched non-farm payroll report that takes place on the first Friday of every month meant that markets were braced once again for the data release at the end of last week. Once again, the asymmetry between the two reports came through with the non-farm payroll report, more closely watched by markets and the Fed, beating estimates and showing closer to one million jobs (943,000) added to the US economy in the month of July. In contrast to the ADP employment report that preceded it, the outperformance of the US labour market in July according to the non-farm payroll data saw the US Dollar rebound as it marked one step closer to meeting the Fed’s conditions to normalise monetary policy.
Discussion and Analysis by Charles Porter