USD: Binary event today – ING

Yesterday’s ADP’s 99k print was the weakest since the reopening of the economy in 2021, as small businesses shed staff in August while medium and large businesses were hiring at a very modest pace. The ISM Services report was steady and in line with consensus at 51.5, but the employment sub-index dropped more than expected to 50.2. The news for the jobs market was not all grim, though; there was a surprising contraction in continuing claims from 1860k to 1838k in the week ending 24 August, ING’s FX strategist Francesco Pesole notes.

Three broad scenarios for Payrolls

“Looking at the soft USD performance over the past couple of sessions, negative job market data has clearly had 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 answered today is: what figures would prompt a 50bp Fed cut in September? We identify three broad scenarios.”

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

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