Dollar Retains Recent Strength; ADP Employment Data Due

By Peter Nurse

AiVIF.com - The dollar maintained its recent positive tone in early European trade Wednesday, as the spreading outbreak of Covid-19 cases in Asia prompts risk aversion ahead of the release of key U.S. jobs data.

At 2:05 AM ET (0605 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely unchanged at 92.080, just off the one-week high hit during the previous session.

USD/JPY was largely flat at 110.50, even though Japan's industrial output posted the biggest monthly drop in a year in May, EUR/USD was also flat at 1.1898, after falling overnight, GBP/USD rose 0.1% at 1.3841, with U.K. first-quarter GDP falling 1.6% on the quarter, while the risk-sensitive AUD/USD was up 0.1% at 0.7518, after slumping around 0.7% overnight.

Risk appetite has taken a hit of late as the spread of the virulent delta strain of the Covid-19 virus through many Asian countries has caused the reimposition of restrictions.

Australian officials extended lockdown and social distancing measures to more of the country on Wednesday, with four major cities already under a hard lockdown. This added to restrictions already announced in the likes of Indonesia, Malaysia and Thailand.

“The price action in G10 FX at the start of this week has temporarily diverged from a carry-trade-like dynamic, taking the form of a risk correction, with the dollar and the yen gaining to the detriment of high-beta currencies,” said analysts at ING, in a note.

Away from news about the coronavirus, there remains some uncertainty ahead of Friday’s closely watched U.S. jobs report, given the importance the Federal Reserve has placed on the recovery of the labor market.

A strengthening labor market could prompt the Fed to rein in its accommodative monetary policy earlier than expected, giving the dollar a boost, but disappointing data will leave the dollar in a vulnerable position, especially after the Fed’s hawkish tone at its last meeting.

Ahead of Friday's payroll data, the ADP nonfarm employment release is due at 8:15 AM ET (1215 GMT), with this private-sector hiring report expected to detail 600,000 new jobs, down from the previous month’s 978,000. 

Before that, Eurozone consumer prices are due at 5 AM ET (0900 GMT), and are expected to tick down in year-on-year terms. That may take the wind out of the sails of the ECB's more hawkish members such as Germany's Jens Weidmann, who said in a speech on Monday that "the risks around the price outlook have shifted...upside risks to price developments being predominant."

Elsewhere, USD/CNY fell 0.1% to 6.4564, after China’s manufacturing purchasing managers index came in at 50.9 for June, slightly higher than the 50.8 expected but lower than May’s 51 reading, falling to a four-month low. The non-manufacturing PMI was 53.5 in June, below the previous month’s 55.2.