Trader thoughts - assessing the feel of the markets into US payrolls

Crude has been on the radar as we traded through the $94 floor, and if I assess client activity, clients are now perfectly split on direction, with 50% of crude open positions held both long and short – to me, the October highs of $86 beckon, but we’ve passed levels in both SpotBrent and SpotCrude where we sat pre-Ukraine invasion.

The BoE making waves through markets

The BoE sent shock waves through markets with their rather sobering forecasts for growth, with a prolonged recession expected through to Q423 – even then we get flat growth in 2024 and 0.4% in 2025. All the while the UK residents have the pleasure of 13%+ inflation to deal with soon. GBPUSD traded to 1.2066 but found some love off the Feb downtrend, but cable remains a tough one to be long given the relative growth dynamic sitting firmly in the GBP bear camp. EURGBP is often the best expression of pure-UK dynamics and that has seen good buyers into 0.8426.

We see EURUSD back into the 1.0270 ceiling – hard to see this being anything more than a USD move and maybe some pre-position ahead of NFPs (Non-Farm Payrolls). A break of 1.0270 would take the pair into the top of the regression channel and 50-day MA at 1.0370, although we won’t see the pair trade here today and 1.0300/20 seems a more realistic level to fade rallies on the day – let’s see the outcome of NFPs and why the USD would have weakened off to that extent before committing to any intra-day trades.  

Trading US payrolls

The USD should follow US Treasuries in the next 24 hours, so watch 2’s and 5’s as they will guide the USD move – higher yields, higher USD. I think the NFP should be straightforward for FX traders, less so for equity index traders - the Fed has made themselves more data dependent, and so bad data should be bad for the USD and good data lifting the buck. Equity is a less-clear play, and good data may reduce the near-term recession risk (an equity positive), but also lift rate hike expectations and bond yields (equity negative).

The 50-day MA has held up the selling for months in the USDX, and we see the USD basket holding the regression channel – US yield curve inversion, which is all the rage right now, has historically been a USD positive, so an NFP print >350k jobs, with a steady U/E rate of 3.6% and wage data above 5% would promote deeper curve inversion, as short-term Treasuries sell-off (yields up) and long-end rates move lower as the market senses a lower growth dynamic. A number between 150-250k would be the goldilocks scenario for risk assets – not too hot, not too cold, and unlikely to dramatically lift the chance of a 75bp hike from the Fed in the 21 Sept FOMC meeting – we currently see 58bp priced for that meeting and 32bp priced for Nov.

(XAUUSD daily)

Gold will be sensitive to moves in the USD and Treasury markets – the set-up (as I discuss in the morning video - https://twitter.com/PepperstoneFX/status/1555291671587614720?s=20&t=j7YVvsfjJG-ErudI2tAFZQ) is quite impressive and we’ve seen buyers of XAU in all currencies, so it's not just a currency play. Price has broken the bear channel and is testing the 50-day MA, one indicator many use as a trend filter for mean reversion - a close above here would be another bullish development. I see 1-month XAUUSD risk reversals turning positive, which shows call volatility trading at a small premium to puts – 1-week riskies sit at 0, so options traders are fairly nuanced over this timeframe, and this tells me a lot about expected movement.  

Keep the NAS100 on the radar – we’ve price testing the Feb downtrend, which after a 20% rally off the June lows could be some solid wood to chop. I would imagine the scalpers would have been all over this trend resistance. A break here, and we start talking fibo retracements at 13,620, after of 14k.

(NAS100 daily)

Event risk summary

So NFPs are firmly on the radar, with some forward focus on next Wednesday's US CPI print (headline expected at 8.8% from 9.1%). We should consider any gapping risk from headlines around China/Taiwan tensions and through Asia today we get the RBA’s SoMP, so keep an eye on AUD exposures.

For those who missed it, take a look at our latest ‘The Trade-Off’. Enjoy - https://youtu.be/pAwC4Qe_c_Q