By Stuart Talman, XE currency strategist
US markets were closed in observance of the Independence Day holiday inducing thinner volumes throughout all three sessions. The dollar continues to trade soft in the wake of Wednesday's shockingly low ISM Services data, providing volume to the narrative of a nominal growth slowdown for the world's largest economy.
Propelled from around 0.6070 to within a pip or so of 0.6130 following the ISM print, the New Zealand dollar handed back around half of it 60 pip surge in early morning trade, Thursday. Consolidatory price action through local and European trade has lifted NZD/USD bac through 0.6120, the Kiwi logging an intraday advance of around three-tenths of a percent.
The past three days price action suggests a prominent swing low near 0.6050 has formed as NZD/USD trampolines off both the 100- and 200-day moving averages and beyond 0.6081, the 38.2% Fibonacci retracement of the April-July rally.
The 23.6% Fib level is located at 0.6135 whilst 0.6150 presents as previous technical resistance. Price action extending through this region likely opens a path to test more critical resistance around 0.6220.
Attention will be squarely on this evening's BLS labour market report, non-farm payrolls expected to report that 190K new jobs were created in June (down from 272K), the unemployment rate remained steady at 4% and average hourly earnings eased from 0.4% month-on-month to 0.3%.
Softness in the employment sub-gauges of both the ISM Manufacturing and Services PMIs suggests a soft NFP number is incoming. In addition, other measures of labour market conditions have also printed on the soft side. That being said, the NFP data point has been astoundingly strong throughout 1H to then be revised lower, raising doubts over its validity.
NFP below 150K and the unemployment rate ticking up through 4% for the first time in over 3 years would provide the fuel for further USD selling, driving NZD/USD back up through 0.6150, perhaps ushering in a new period of sustained dollar weakness.
Also observed over the coming 24 hours will be the results of the UK election, polls projecting the Labour Party will secure enough seats to form a majority. Exit polls, which are a reliable predictor of the ultimate outcome will be published in a few hours.
Should the result align with polling, the impact on short-term GBP direction is likely to be minimal.
Having peaked near 0.4850 in early and late June, NZD/GBP has formed a double top, falling over one-and-a-half percent over the past fortnight, marking this week's lows a few pips through 0.4780. The election result should not impact the Bank of England's plans which likely involve a cut being delivered in August.
Expectations are for NZD/GBP to range trade between 0.4770 and 0.4840 through July.
In other news from Thursday, ECB minutes were released from the June meeting in which the eurozone central bank cut their policy rates by 25 bps. Both the minutes and speeches at this week's ECB Sintra conference convey a message of patience. The ECB will not be following up with a series of cuts given the prevalence of wage inflation and solid activity levels.
Having failed to break through a 0.5730/50 resistance zone in mid-June, NZD/EUR has retreated close to 2% over the past few weeks, locating support around 0.5640 earlier in the week. How quickly the ECB opts for its next cut will determine the next key directional move for euro crosses. Current market pricing projects circa 40bps of additional easing before year-end.
To the day ahead, eurozone retail sales and Canadian jobs data are the other tier 1 data points to accompany US employment numbers on Friday's docket.
Assuming an in-line to weak jobs report, the Kiwi ends the week on an uptick, challenging 0.6150.
Stuart Talman is Director of Sales at XE. You can contact him here.
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