ING: The USD - FJElite
FX markets are looking fatigued with the Gulf story. Weekend news of the US and Iran still negotiating a peace deal while exchanging limited military fire has so far had little effect on either energy, equity or FX markets. One-month G7 FX implied volatility has dipped back to the lows seen in the summer of 2024 and suggests that geopolitics is expected to play a lesser role in FX markets over coming months.
However, it looks like the US macro story could be gaining a little momentum and be ready to provide some broader support to the dollar. This week will see a whole host of US job market reports and business surveys.
Regarding the US labour market, Tuesday sees JOLTS job opening data for April, Wednesday sees the May monthly ADP reading, Thursday sees Challenger layoff data, and the week culminates in Friday's May non-farm payrolls (NFP) data - expected at a healthy +90k increase and the unemployment rate staying low at 4.3%. We also receive ISM business surveys for the manufacturing sector (released today) and the services sector (Wednesday), which will provide insights into employment trends, as well as order books and pricing power. And the Federal Reserve's Beige Book (Wednesday) will provide insights into the latest pricing and employment trends across the central bank's 12 districts.
This week's data should further support the growing narrative that the Fed can be comfortable with its full employment mandate and can focus squarely on the upside risks to inflation. Having heard from the Fed's most dovish member on Friday, Michelle Bowman, the speaker calendar switches back to the hawks this week in the form of Neel Kashkari, Beth Hammock and Lorie Logan.
Should the jobs data stay supportive and price pressures through the ISM surveys remain intense, markets can probably shift towards pricing one full 25bp Fed rate hike this year. That compares to +17bp of tightening priced currently.
Low volatility will see ongoing interest in the carry trade, and if the dollar is to rally on stronger US activity data, it is more likely to be against the low-yielders of the Japanese yen and the Swiss franc. As we discussed on Friday, unless the Bank of Japan can turn surprisingly hawkish, USD/JPY looks biased to the 162 area. Expect DXY to continue to find good support in the 98.75/99.00 area and press the 99.50 area again this week.