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It seems like fears about the Greek sovereign debt crisis have been replaced by fears over global growth as the chief driver of risk appetite. The IMF/ EU and ECB are expected to make an announcement today that will report the findings of the troika's audit on whether Greece is meeting its fiscal and privatization targets under the current bailout plan.
This announcement, which is provisionally planned for 1500 BST, will be key to Greece securing its next trance of bailout funds due at the end of this month. However, rather than fill the markets with fear, investors seem to assume that Greece will receive a slap on the wrist, will promise to do better next time and all the funds will be released on time and without a fuss. Could this be why EURUSD is flirting with 1.4500? If we get a weekly close above 1.4500 then the single currency would be set up nicely for another stab at 1.5000 in our opinion.
But before that there is the major hurdle of the latest US labour report due at 1330 BST/ 0830 ET. Analysts have revised down their expectations for this figure after a dismal ADP payrolls number earlier this week that reported the private sector only created 38k jobs last month. This has dented risk appetite in recent days.
Traditionally the ADP and NFP have no particular correlation of note. Over the last 12 months the correlation has been -0.475, which suggests the two figures move in opposite directions, but not to any significant degree. But since the start of this year the correlation has been much stronger at nearly 0.80. If this pattern is to continue then Wednesday's weak ADP reading should point to a weaker NFP figure.
But how will the markets react? The market seems to have set itself up for a weak reading. Treasury yields dropped below 3 per cent at one point this week on expectations that the Fed would remain on hold for a prolonged period if the economy goes through another summer malaise. This has weighed on the dollar, and pushed stocks lower.
So the risk is that we get a number better than the market expects. Even if we get a reading around the 150k mark it would be better than the ADP predicts, in this case we may see risk rally. Alternately, a very weak figure would reinforce investors' fears about a US economic slowdown, weighing on risky assets, pushing up bond prices (yields go lower) and possibly weighing on the dollar as falling Treasury yields erode support for the greenback.
In terms of currency movements, USDJPY is traditionally the most sensitive to movements in the NFP. A weak figure could see it fall sharply, and inversely a strong reading (or one that is not as bad as some think) could see it rally. Interestingly, the ISM manufacturing report's employment component for May showed fairly strong hiring in the sector, which tallies fairly well with NFP, so it should be an interesting afternoon.
Along with NFP at 1500 BST/ 1000 ET the US ISM non-manufacturing survey is released. This is expected to rise to 54.0 from 52.8 last. However, we believe the tone in financial markets will be set by the NFP report, which is the key release in our view.
The news that Moody's was putting the US's sovereign credit rating on review with a risk of downgrade confused the market last night. Right now a slowdown in growth is the focus, and debt concerns, while certainly on the horizon, are not top of the list of priorities. We will have to wait for later this summer when the US reaches its debt ceiling for concerns about US solvency to jerk the market into action.
Elsewhere, the pound has been under pressure after a weaker than expected reading in the PMI services sector survey for May. It moderated to 53.8 from 54.3 last and is the lowest level since February.
European services sector surveys were fairly strong. Overall the sector posted a healthy reading of 56.0, down slightly from 56.7 in April. So although growth in the all-important service sector is moderating it is not falling off a cliff, which is good news for Q2 GDP figures.
So watch out for headlines from Greece and that all important payrolls figure. In the lead up to the report we expect the dollar to continue to do badly, the euro to remain strong and risk to tread water.
Data watch:
United States 13:30BST (0830 ET) Change in Nonfarm Payrolls (May) 165K EXP, 244K LAST
United States 13:30BST (0830 ET) Change in Private Payrolls (May) lvl 173K EXP, 268K LAST
United States 13:30BST (0830 ET) Unemployment Rate (May) 8.9% EXP, 9% LAST
United States 15:00BST (1000 ET) ISM Non-Manf. Composite (May) index 54.0 EXP, 52.8 LAST
United States Fed's Tarullo (17:30BST/ 1230 ET), Rosengren (20:30BBST/ 1530 ET) Speak
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Best Regards,
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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