USD: Binary Event Today – ING

Yesterday’s ADP figure of 99k was the weakest since the economy reopened in 2021 as small businesses laid off staff in August while medium and large firms hired at a very modest pace. The ISM Services report was stable and in line with consensus at 51.5, but the employment sub-index fell more than expected to 50.2. However, the news for the labour market was not all grim; there was a surprising contraction in continuing claims from 1,860k to 1,838k in the week ending 24 August, notes Francesco Pesole, FX Strategist at ING.

Three broad scenarios for payrolls

“Looking at the soft performance of the USD over the past few sessions, negative labor market data has clearly had a greater resonance in FX. So even if the consensus figure for payrolls is 165k, markets may be positioned for a lower figure. Ultimately, the question markets need to answer today is: what figures would trigger a 50bp cut by the Fed in September? We identify three broad scenarios.”

“Payrolls below 100k, unemployment up to 4.4% (consensus is 4.2%): 50bp cut in September becomes base case, USD plummets. Payrolls weaker than consensus but above 100k, unemployment unchanged at 4.3% or up to 4.4%: markets will be left guessing on size of September cut. Payrolls at or above consensus, unemployment eases: 25bp cut in September, room for hawkish repricing in USD OIS curve, currently pricing in 175bp of cuts over next five meetings.

“Our US Economist’s estimate is for 125k, with unemployment up to 4.4%. If we are correct, markets may price in the September 18 Fed announcement around 35bp-40bp, which should keep the dollar capped until the binary rate cut event plays out. Our forecast remains for a 50bp cut this month. Expect payrolls-driven USD weakness to favor both low-yielding and pro-cyclical currencies today.”