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Week Ahead – Nonfarm Payrolls Highlight a Huge Week

Global markets will go into overdrive next week, with two central bank meetings and a landslide of data coming up. The RBA will probably reverse its tapering plans amid extended lockdowns in Australia, whereas the Bank of England might strike a slightly more optimistic tone. Of course, the main event will be the US jobs report, which will determine how quickly the Fed dials back stimulus.

Dollar braces for payrolls

Fears that the Federal Reserve might announce a slowdown of its massive asset purchases in August subsided this week after Chairman Powell stressed that the labor market still hasn’t recovered properly. The dollar moved lower in the aftermath as real US yields fell to new record lows, with the markets clearly pricing out the risk of an imminent taper.

That said, the overall message wasn’t so dovish. The Fed highlighted that the economy has made progress towards its goals and Powell even said “we are clearly on a path to a very strong labor market”. He also dismissed the Delta variant as being a major risk and suggested that inflation might head even higher in the near term, before cooling later on.

The bottom line is that August may be too early for a tapering announcement, but September is still in play. The Fed can examine another two employment reports by then to make sure the labor market is strong and Congress could deliver another round of spending on infrastructure. Ultimately, this argues for a stronger dollar, especially against the euro and yen as neither the ECB nor the BoJ will follow the Fed anytime soon.

Considering all this, the upcoming US employment report on Friday will be absolutely critical for how the dollar performs. Nonfarm payrolls are expected to clock in at 926k in July, pushing the unemployment rate down two clicks to 5.7%. It seems like many people are returning to the jobs market now that the generous unemployment benefits have started to expire.

The US economy is still missing some 6.7 million jobs to recover completely. However, many people decided to retire once the pandemic hit, around 3 million by some estimates. Therefore, America might only be missing around 4 million jobs for a full recovery, which means we might be back at full employment by the end of the year at this pace!

Ahead of Friday’s jobs numbers, the ISM manufacturing PMI will hit the markets on Monday, before the services index is released Wednesday.

RBA to put tapering plans on ice

The Reserve Bank of Australia meets on Tuesday and it might be forced to abandon its plans to trim asset purchases. Just four weeks ago, the RBA said it would slow down its purchases of government bonds as the economy was much stronger than it had expected.

Things have changed dramatically since then, with much of Australia trapped in a lockdown to fight the Delta variant. The economy is headed for a contraction this quarter that will cost many jobs, canceling out much of the earlier progress in the recovery.

Hence, the RBA will probably strike a very cautious tone next week. Policymakers have stressed that bond purchases can always be increased again if the economy weakens, and now would be a great time to demonstrate this flexibility.

If the central bank indeed abandons its taper plans and signals that bond purchases won’t slow down after all, that could hammer the aussie lower.

BoE: Neutral, with an optimistic flavor

On Thursday, the central bank torch will pass to the Bank of England. A couple of BoE officials made headlines recently after they called for withdrawing some stimulus.

Inflation is already running hot and they fear that unless the Bank takes its foot off the accelerator soon, this could start to infect inflation expectations and become more permanent. If enough people expect higher inflation moving forward, then it becomes a self-fulfilling prophecy be