Nervousness in the markets ahead of Friday’s jobs report is evident
in FX volatility, which is pricing in much greater volatility than is typically realised on payrolls day. A surprise in either direction will matter. Our NFP forecast stands at 170k, slightly above the consensus expectation at 165k. Given the record reduction in USD longs in CFTC data, this could indicate that the market is skewed towards USD weakness, suggesting there could be an asymmetric outcome space favouring a stronger USD if NFP data meets or exceeds expectations. Hence, if our forecast is correct, we will likely see higher US yields, a stronger USD, and markets converging towards a 25bp rate cut at the FOMC meeting on 18 September.
Our new Fed call does not significantly alter our view on the USD. We still expect the relative outperformance of the US economy to favour the greenback over the strategic horizon, but we have slightly raised our longer-term forecast due to expectations of more front-loaded cuts from the Fed in the coming year. Additionally, we have recently revised our ECB call, now anticipating two rate cuts from the ECB this year. This means that we think relative rates will only be moderately positive for EUR/USD for the rest of 2024. Generally, we find it challenging to be bullish on the EUR over the coming year given the weak growth momentum in the euro area coupled with recently benign inflation data. In the near term, we expect EUR/USD to trade around current levels. While there is potential for a stronger USD this week, the greenback could face downward pressure in the coming month as the Fed begins its cutting cycle, and risk sentiment may remain positive. We forecast EUR/USD to steadily decline towards 1.07 over a 12M horizon
-Danske Bank
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