The dovish ECB press conference yesterday weakened the Euro as well as other European majors and set the stage for a dollar rally. The torch is now passed to employment report from US today. Non-farm payroll is expected to show 220k growth in the job market in August. Unemployment rate is expected to drop to 5.2%. Average hourly earnings are expected to grow 0.2%. The pre-NFP employment data pointed to downside risk in today's release. The ADP employment report showed 190k private sector job growth in August, missing expectation of 200k. 4 week moving average of initial claims rose from 268k to 276k in the past month. Employment component of ISM manufacturing dropped from 52.7 to 51.2, hitting the lowest level since April. Employment component of ISM non-manufacturing dropped from 59.6 to 56.0. Nonetheless, Conference Board consumer confidence improved sharply from 91.0 to 101.5 and hit the highest level since January.
Markets have been paring bets on Fed hike quite notably in recent weeks as the financial markets were in turmoil. At At this point, fed fund futures were implying 30% odds of rate hike in September, 40% in October and 55% by December. We maintain that dollar's reaction to NFP would be more skewed to the downside. That is, a miss in NFP today could trigger a larger reaction than an upside surprise. Technically, the dollar index's rebound form 92.62 resumes yesterday and breaches 4 hours 55 EMA. The rise might extend to 98.33/100.39 in near term. But strong resistance could be seen there to bring another falling leg in the consolidation pattern from 100.39. Meanwhile, break of 91.19 support will turn focus back to 92.62 low.
Elsewhere, Japan labor cash earnings rose 0.6% yoy in July. German factory orders, Eurozone retail PMI, Swiss CPI will be released in European session. In addition to US NFP, Canada will also release job data and Ivey PMI in US session.
Yesterday, ECB kept interest rate unchanged at 0.05% as widely expected. The central bank downgraded economic outlook and hinted that its ready to expand the quantitative easing program given the downside risks. ECB forecast inflation to be 0.1% this year, 1.1% in 2016 and 1.7% in 2017. That compared to prior projections of 0.3%, 1.5% and 1.8% respectively. Growth is projected to be 1.4% this year, 1.7% in 2016 and 1.8% in 2017. That compared to prior projections of 1.5%, 1.9% and 2.0% respectively. And taking into account the lower energy prices and exchange rate developments, there were even "downside risks" to the central bank's revised projections. Meanwhile, ECB also raised share limit of any single bond was raised from 25% to 33%. Such increase in limit would enable ECB to buy higher share of an individual country's bonds and give the central bank more freedom in focusing on particular issues.