Investing.com – All eyes in the foreign exchange markets are firmly focused on Friday’s US jobs report, with Citi stating that the release is likely to market moving for G10 FX, and the US dollar in particular.
From last month’s labor market report in early August until now, market reaction to data has been asymmetric for USD: data beats have been relatively neutral USD, while data misses have seen sharper and more broad-based USD weakness, analyst at Citi said, in a note dated Sept. 3.
However, in the bank’s view, August was heavily driven by positioning, which has now flipped from long USD to short USD, and a focus solely on the US side of the growth story.
“We continue to emphasize that the growth backdrop in the rest of the world remains concerning, especially for manufacturing countries (e.g., Germany, China). We also have a significantly more dovish Fed priced by markets compared to one and two months ago,” Citi added. “We thus expect the USD reaction function to be somewhat different going forward compared to recent months.”
The market could be entering a period of greater dispersion in FX, Citi said, with risk-off on growth concerns leading to USD underperformance against lower beta FX, but outperformance against higher beta FX.
Thus a print in line with Citi’s expectations–an of 4.3% and of 125,000–should see and downside, but not necessarily broader USD weakness.
“A more ambiguous print shifts attention to Fedspeak thereafter; here the market could face knee-jerk USD selling on a downside miss into Fed Governor Waller. A strong print could accelerate any USD short covering from the leveraged segment and see JPY and CHF underperform,” Citi said.
Analysis and Breakdown
The US jobs report is a critical event for the foreign exchange markets, especially for the G10 FX and the US dollar. The data’s impact on market movements can be significant, depending on whether the results meet, exceed, or fall short of expectations.
According to Citi, recent market reactions to USD data have been influenced by positioning, with a shift from long USD to short USD. This change, along with global growth concerns and a more dovish Fed stance, could alter the USD reaction function in the coming months.
Citi also predicts a period of greater dispersion in FX, with USD performance varying against different currencies based on risk-off sentiments and beta levels. A print in line with Citi’s expectations may not lead to broader USD weakness but could impact specific currency pairs differently.
Looking ahead, Fedspeak following the jobs report could further influence USD movements, with potential knee-jerk reactions based on the data. A strong print might trigger USD short covering, while a downside miss could lead to USD selling against certain currencies.
Overall, understanding the implications of the US jobs report on the forex markets and the US dollar is crucial for investors and traders to make informed decisions and manage their financial positions effectively.