On the eve of the publication of the US labor market report, the dollar received very tangible support. The ISM index in the services sector rose in August to 56.4p from 53.7p a month earlier and the sub-indices of business activity and new orders rose above 60p, which indicates a strong growth of optimism. The only alarming signal is the decrease in the employment sub-index from 56.3p to 53.1p, which contradicts the ADP report. It shows the private sector employment increased by 195 thousand after three months of relative weakness.
At the same time, Markit gives a completely different result of the activity in the services sector as it slowed in August 50.7p versus 50.9p a month earlier and barely exceeds 50p. That is, growth is barely noticeable and the current PMI level is at a minimum for 3.5 years.
Since investors tend to focus on ISM indices as being more informative, the optimism before the publication of Nonfarm has grown slightly. However, one can't help but worry about the huge gap between the results of ISM and Markit with both agencies noting that the labor-market slowdown continues.
This report is the last before the key meeting of the Fed at the rate, therefore, attention to it has increased. While the forecasts are neutral, experts do not expect noticeable deviations from the July results either in the number of new jobs or in the rate of increase in wages. Hence, the dollar is under slight pressure due to a decrease in the level of risk. The chance to see a failed employment report is higher than positive, thus, the likelihood of a further weakening dollar on Friday remains high.
EUR / USD pair
Markets are preparing for the ECB meeting next week, which is expected to announce the introduction of the next stimulus package. It is significant that the euro is strengthening against these expectations, which indicates at least two important points - the markets take into account the 10p rate cut, and this decrease will not lead to increased pressure on the euro, as well as the resumption of the asset purchase program by 30 billion euros per month.
Accordingly, the intrigue is whether the ECB will present a more extensive package than has already been taken into account by the market, for example, a reduction in the base rate by 20p, a decrease in the deposit rate and a more extensive repurchase program. Most banks believe that this will be so. In particular, DanskeBank and Nordea suggest that the ECB will provide a more significant mitigation package, which will lead to a depreciation of the euro. Otherwise, the inflation target would not be achieved.
For 9 meetings, when the ECB was under the leadership of Draghi, the EUR/USD lowered the rate and drop in average to 151p. So if expectations are met, the euro will go below 1.0925 and will seek support in the 1.0870/90 zone. If the markets are inclined towards this scenario (Danske believes that it has at least 60% probability), then the euro will have good prospects for decline even before the Fed meeting approaches.
This scenario will become relevant closer to the middle of next week. On Friday, the euro looks stronger both due to a decrease in geopolitical tensions and the risk of seeing weak non-farms, which is why it is more likely to increase to yesterday's maximum of 1.1083.
GBP/USD pair
The pound responded with growth to a serious defeat of Boris Johnson in the British Parliament. On Wednesday, the lower house passed a law. According to which, the government is obliged to postpone Brexit until January 31, 2020, in the absence of an agreement with the EU while Johnson's counter-attempt to dissolve parliament and hold early elections failed.
In the short term, this news is an absolute positive for the pound, which can resume growth if the likelihood of reaching an agreement with the EU increases. However, according to Michel Bernier, the EU's chief negotiator, the negotiations are paralyzed at this stage and Johnson has other ways to get an early election. Therefore, the pound's growth is unlikely to be strong.
Today, an attempt is likely to update a maximum of 1.2354 and the support at 1.2307.
