Cautious mood leading up to US non-farm payroll release: GBP/USD, Nikkei 225, EUR/USD

Market Recap

Despite some dip-buying attempts on Wednesday, major US indices continued to remain under pressure overnight, as building rate hike bets in the lead-up to tonight’s US non-farm payroll left investors shunning. This came despite higher-than-expected jobless claim figures, with an upside reaction following the data release proving to be short-lived. Part of the reason for the shrugging off may be due to distortions in the claims data, brought on by the impact of Hurricane Fiona in the second half of September while Hurricane Ian in Florida could inject further noise to claims data over the coming weeks. This led risk sentiments to take its cue from a series of Federal Reserve (Fed) officials’ comments overnight, which sang the same tune for continued rate increases to tackle the more persistent pricing pressures. Market pricing points to an almost-certain 86% chance of a 75 basis-point (bp) hike in November, with further push towards 4.75-5% through the rest of next year. Treasury yields moved higher across the board as a result, along with renewed strength in the US dollar, while US equities head lower in reaction to the shift in rate expectations.

The US job report release will undoubtedly be the highlight today. With recent dip buyers jumping on hopes that weaker economic data will challenge the Fed’s tightening process, a more tepid increase in job gains may be warranted to justify the narrative. While it may seem to be more of a one-sided view, any underperformance may leave markets with some breathing room before the Federal Open Market Committee (FOMC) minutes and US Consumer Price Index (CPI) data hit next week. Current expectations are pointing to job addition of 250,000, while unemployment rate will remain unchanged at 3.7%. Any figure below 200,000 may be preferred by market bulls. Average hourly earnings are expected to remain unchanged at a 0.3% increase month-on-month (MoM) as well.

Renewed US dollar strength seeks to overturn the recent recovery for the GBP/USD, with a bearish rejection off the 1.145 level of resistance. After the recent emergency intervention by the Bank of England (BoE) in the bond market, unwinding of the operation is being considered. For now, the overall downward trend remains intact with the lower highs being presented since May last year. Market expectations are still looking at a 100 bp hike from the central bank in November but elevated growth risks have put the scope of that hike into question. Failure to deliver to rate expectations, mounting recession risks, along with the US dollar retaining its upward trend, are headwinds that the pair will continue to struggle with.

Asia Open

Asian stocks look set for a negative open, with Nikkei -0.83%, ASX -0.59% and KOSPI -0.62% at the time of writing. The economic calendar for the day ahead is largely quiet for the Asia session, leaving sentiments to take on a more cautious tone from the lacklustre performance in Wall Street and in the lead-up to the US job report. Ongoing de-risking will leave Asian indices to trade lower, with the Nasdaq Golden Dragon China Index closing 3% in the red yesterday.

This morning saw the release of Japan’s household spending for August. A 5.1% increase from a year ago reflects the positive impact from economic reopening, but spending was lower than the expected 6.7%. Household spending contracted 1.7% MoM, a total opposite of the 0.2% expansion expected. Elevated prices in tune with the ongoing build-up in inflation readings, along with the weak yen, could seem to restrict sentiments to spend.

The Nikkei 225 index remains on watch, with its significant 25% exposure to the technology sector leaving it more sensitive to yield changes. Yesterday’s upward move was met with the rejection of its 100-day moving average (MA), leaving a bearish shooting star candle at the close of the trading day. The index is attempting to hold above the 26,900 level for now, where a key 38.2% Fibonacci retracement and a bullish crossover on moving average convergence divergence (MACD) is providing some support. Much will revolve around the US non-farm release today. Any subsequent move below the 26,900 level may provide confirmation to the bearish candle, which may potentially point to further downside towards 26,000 level next.

On the watchlist: EUR/USD remains stuck in a downward channel

The parity level has proved to be a challenging level to overcome for the EUR/USD, as a retest of parity in coincidence with its 50-day MA at the start of the week has failed to sustain thus far. The release of the European Central Bank (ECB) meeting accounts yesterday justified the more-than-expected 75 bp rate hike in September with increasing concerns of more entrenched inflation. That continues to place the central bank on an aggressive tightening path despite the deceleration of economic activities pointing towards elevated growth risks. While the Euro’s upside could remain capped with increasing recession chatters towards the rest of the year, US dollar has seen some renewed strength yesterday, with the absence of a policy shift from the Fed leaving it with an overall upward bias. The downward trend for EUR/USD may seem to remain until the descending channel pattern since February this year is broken, which does not seem to be playing out yet.

Thursday: DJIA -1.15%; S&P 500 -1.02%; Nasdaq -0.68%, DAX -0.37%, FTSE -0.78%