The mood is strengthening in the markets regarding the Federal Reserve's next rate hike by 75 basis points this month, despite the unexpectedly soft ADP report on private sector employment for August, published on Thursday. In addition, traders are now laying on an 80% probability of a similar increase from the European Central Bank next week.
The yield on 10-year US bonds exceeded 3.2% for the first time since June, and the yield on eurozone and UK bonds also increased.
However, the euro and the pound continue to be in the firing line. Following the optimistic US releases, the dollar index flew up to the level of 110.00 at the moment.
The number of initial applications for unemployment benefits for the week decreased by 232,000, which was better than market expectations of 248,000. A week earlier, the same figure was 237,000.
The labor market remains strong. Friday's employment report again carries risks for stocks. If it is good, the prospects for further tightening of monetary policy will become even clearer.
It is expected that unemployment in the United States remained at the July level of 3.5%, and the number of people employed in non-agricultural sectors of the economy increased by 300,000.
The index of business activity in the US manufacturing sector also turned out to be better than the forecast. As in July, the indicator was 52.8 points, while the markets were waiting for its decline to 52.
This is the lowest level for the last two years, however, it is above 50, which indicates an increase in business activity.
On Thursday, it also became known that according to the Atlanta Fed's model, the US economy is expected to grow by 2.6% in annual terms in the third quarter, compared with 1.6% in the previous estimate.
ING economists believe that the dollar index, which has resumed its rally above 109.00, will reach the level of 110.00 in the coming days.
For two days in a row, the data reinforced the Fed's thesis that the US, although in a state of technical recession, as evidenced by GDP, but the economy is still strong. Thus, the latest data may be a prelude to a solid report on employment in the US non-agricultural sector on Friday.
"The US manufacturing sector continues to develop at the same pace as in the previous two months. New orders have returned to the growth level. In August, companies continued to hire employees at a high rate, and there were few signs of layoffs," ISM comments on the situation.
Traders' unwillingness to take risks causes stocks to fall. The EUR/USD exchange rate broke below parity on Thursday, continuing to bear losses after reaching a weekly high of 1.0079 on Wednesday. The euro lost more than 1% within the day, reaching the level of 0.9910. This is the lowest mark for the last few days.
Meanwhile, the firm support of the EUR/USD pair is located at 0.9900. The pair is expected to maintain this level at least until the key release of data on employment in the US non-agricultural sector on Friday.
A breakthrough of the weekly high of 1.0090 is likely to lead to further growth to 1.0202. In the long term, a bearish view of the pair will prevail as long as it is trading below the value of 1.0800.
However, do not forget about what the head of the European Commission Ursula von der Leyen said at the summit in Slovenia this week. She announced that Brussels will seek to reform the electricity market in the first months of next year.
It is unclear what form the EU's intervention in the energy market may take, but when politicians talk about their intention to change the rules, it is worth considering that the rules may be about to change. This goes into the euro piggy bank, although not immediately.
The euro may still support suggestions that the ECB will follow in the Fed's footsteps and raise the rate by 75 basis points next week.
According to analysts, the euro's recovery is likely to be facilitated by new long positions and the closure of short positions before the ECB meeting, since European officials for some reason suddenly believed in inflationary risks.
"We would not reduce positions in the euro until at least September 8. The risk-reward ratio seems bad," the strategists comment.
The British pound looks extremely unfavorable after the euro and the Japanese yen. Note that on Thursday the national currency of Japan collapsed below the level of 140.00 against the dollar for the first time since 1998.
As for the pound, it fell to its lowest level against the dollar since the start of the pandemic – after the worst month immediately after the Brexit referendum in 2016. In England, it is feared that the winter downturn in energy prices will worsen both inflation expectations and fears of a deep recession. The central bank of the country may fall behind its colleagues in tightening policy in order to find a middle ground, even though it actively sells government bonds from its portfolio.
The GBP/USD quote has dropped to 1.1500 and continues to remain under strong downward pressure.
"Amid a gloomy domestic context, determined by rising energy prices and the cost-of-living crisis, which affects activity and economic prospects, greater stock market volatility can only mean more pressure on the British pound in a broad sense," Scotiabank analysts write.
In their opinion, there is now no good reason to expect a significant improvement in the prospects of the pound. There is almost no clear support before the 2020 low at 1.1415.