Asian markets are taking a breather as traders await the US jobs data for July, which could be key for the Fed's decision on their next rate hikes.
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The Market Mood
The MSCI Asia-Pacific index (excluding Japan) is flat and is down 0.4% this week. The Japanese Nikkei dropped 0.9% , while South Korea's KOSPI lost 0.5%, pushing it down for the seventh week in a row.
Traders seem to be proceeding with caution. "Given that yield and inflation remain the main risk for stocks, we expect Friday's NFP data to be seen as bad news if it is good news", said Michael Feroli, chief U.S. Economist at JPMorgan. Good news would push the Fed to consider higher for longer rates, while bad news would trigger a relief rally in stocks.
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Oil Prices Jump on Hormuz Tensions
Oil prices are on the rise with escalating tensions in the Middle East. Houthi militants from Yemen have attacked Saudi Arabia, and Riyadh warned of impending simultaneous attacks from Houthis and Iran-backed Iraqi militia.
The Islamic Revolutionary Guard Corps (IRGC) of Iran has launched an attack against "hostile actors" in the Strait of Hormuz, reigniting fears over regional security and energy supplies. Iran has denied achieving any breakthroughs in US peace talks, triggering sharp criticism from President Trump. This move came after an initial withdrawal from launching retaliatory missiles after Trump cited US-Iran negotiations.
Both WTI crude and Brent rose 7.6% and 5.4%, respectively, this week, reaching close to $90/barrel. An increase in oil prices led to a rise in Treasury yields: the 2-year yield reached 4.25%, up 7 basis points, while the 10-year yield rose to 4.68%.
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The Key Event: NFP Data
The Bureau of Labor Statistics will release its July Employment Situation data report at 12:30 PM GMT (8:30 AM ET).
Data:
Metric
Previous (Jun)
Forecast (Jul)
Nonfarm Payrolls
57,000
80,000-88,000
Unemployment Rate
4.2%
4.2%
Average Hourly Earnings (MoM)
0.3%
0.3%
Participation Rate
61.5%
-
Early indicators appear to be mixed, as weekly jobless claims reached 199,000, lower than the 202,000 predicted, while planned layoffs fell 27% to a two-year low. Worker productivity grew by 1.4% in Q2, better than the 0.6% predicted, contributing to limited wage inflation.
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The Three Scenarios
Scenario 1: Goldilocks (75K-100K, 4.2% UE)
The optimal outcome for risk assets. This indicates that the economy is decelerating without collapsing .
USD: Could see a slight weakening
Gold: Likely to hold steady between $4,020 and $4,118
Fed Odds: The chances of a September hike will remain between 59-64%
Scenario 2: Beat (100K+, wages strong)
This would further cement the Fed's hawkish stance and boost the likelihood of a September hike. Strong jobs numbers will likely lead to expectations of higher rates for a longer period.
USD: Could rise to 101.80-102.00
Gold: Likely to fall to $4,000 or lower
Fed Odds: The probability of a September hike will likely surge above 70%
Scenario 3: Miss (Below 60K, unemployment to 4.3%+)
This would be the most alarming scenario, considering the expectation of 80-88K jobs.
USD: Could experience a rapid decline toward 98.60-98.00
Gold: Could break above $4,118 towards $4,200+
Risk Assets: While the markets might initially rally on hopes of dovishness, recessionary fears may take over.
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Key Outlook
For DXY: The key support is at 99.30-100.30.A weekly close below 99.30 might indicate a deeper correction toward 98.60-98.00.
For Gold: The commodity is consolidating in the range of $4,060-$4,118. "The level of $4,000 has proved to be a strong support level," with bulls waiting for dips to set up a rally towards $4,600.
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