Currency Point: NFP holding the Keys

We look to be pushing to an inflection point in the USD – the continuous decline in DXY over the past 4 weeks begun slow late the week before and accelerated last week as US data looks to have reignited the reflation hypothesis.

This included:
The ISM Services PMI hit 64.0 in May a record all-time high. All major components improved but the standout where orders backlog index (restocking) and ‘prices paid’ which is now just 0.4 of the record peak in 2005.

The Markit services and composite PMIs also hit record all time highs in May to record. The Services PMI hit 70.4 in the final May reading (from 70.1 in the preliminary the key component ‘prices charged’ at record high. The Composite PMI finished at 68.7 from 68.1 in the initial read up from the April read of 63.5.

This screams future inflation.

Then there is the employment data, US ADP private sector payrolls rose 978,000 in May smashing the expected 650,000. Would point out that April was revised down to 654,000 from 742,000 which is more in line with the non-farm payrolls. Putting April to one side May was the largest monthly increase since June 2020, reflecting a healthy recovery. Further standout points from the ADP figures were the service sector added 850,000 jobs and backing the PMI prints. Initial jobless claims over the week to 29 May were 385,000, a fresh 14 month low.

This shows that Friday’s NFP is key for pairs as the data is getting to the point, we suspected that it would overwhelm Fed speak. We understand we have been wrong to date, but a sizable NFP will likely give the push the USD is searching for.

USD has moved well against all G10 currencies to end last week, with the Aussie and Kiwi weakest pairs. EUR/USD fell from $1.2210 to $1.2125.

USD/JPY broke through finally moving from ¥109.60 to ¥110.30, a new two-month high. If we hold the ¥110 mark pair will quickly move to ¥112.

Need to highlight AUD/USD it just could not breach $0.78, this is despite last Wednesday’s GDP read and iron ore breaching US$200 a tonne again. Yet it didn’t even entertain 78 cents, but once the US data came AUD/USD fell -1.2%, from $0.7755 to $0.7660, with a low of 0.7646, its weakest point since 14 April, this is a very bearish signal for a pair that was in a tight range.

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