(09 JULY 2018)DAILY MARKET BRIEF 1:USD loses ground amid disappointing wage growth

The US dollar continued to lose ground on Monday after mixed economic data and escalating trade tensions. Investors reacted strongly to the last job report as they put the trade war story on the backburner. Despite the fact that the US economy added more private jobs than expected (213k versus 195k expected), the dollar fell sharply following the announcement. The unemployment rate ticked up to 4% (from 3.8% in May) amid an increased number of job seeker. However, it looks like market participants chose to focus on the lack of positive pressure on wage. Indeed, wage growth is the only missing piece of the full employment puzzle. Average weekly earnings increased only 2.7% (versus 2.8% expected), which means that on an inflation adjusted basis wage growth would stall if not contract in June (headline inflation rose 2.8%y/y in May and is expected to have increased 2.9% in June – thanks to rising oil prices).

In anticipation of weaker inflation pressure, investors adjusted their rate hike expectations to the downside. According to the Overnight Index Swap, the probability of a September rate hike has eased to 73%, from 84% a couple of days ago. Although this is a marginal decrease, it summarized the overall sentiment in the market. Equities reacted positively to the perspective of a less abrupt rate path in the US.

The greenback fell the across the board this morning. EUR/USD rose 0.22% to 1.1775, the Aussie reached $0.7465 (up 0.50% on the session), while USD/CHF fell 0.22% to 0.9872. However, we are still trading within a monthly range. The trade war will prevent a massive USD sell-off as investors will maintain a cautious approach.

By Arnaud Masset