Market Drivers – US Session, August 3

In Q2, productivity growth rebounded sharply, outpacing predictions and increasing at a rate of 3.7%. The increase in output per hour worked over the past year has increased by 1.3%, the first positive yearly improvement since late 2021. Productivity is on the rise, and nominal pay growth is moderating, both of which indicate that labour market-driven inflationary pressures are beginning to ease.

Due to widespread caution, the US economic data had little effect on the US Dollar. The US 10-year Treasury yield increased to 4.17%, the highest level since November, while US markets ended marginally down. Following Fitch’s credit downgrade, the US stock market has been trending downward as investors appear to be taking profits following the rise that started on July 10.


Economic Data

Data released in the United States on Thursday showed that Initial Jobless Claims rose to 227,000 for the week ended July 29, as expected. Q2 Unit Labor Costs rose at a rate of 1.6%, below the expected 2.6%, and Q1 was revised from 4.2% to 3.3%. Factory Orders rose by 2.3% in June, in line with expectations, while the ISM Services PMI declined from 53.9 to 52.7, below the estimated 53.

Key Developments

After reaching new weekly highs, the US Dollar Index fell, snapping a five-day winning streak, and was trading at 102.50. EUR/USD fell to monthly lows of 1.0950 before rising and finishing level at or near 1.0950. On Friday, the Eurozone will reveal data on retail sales while Germany will report factory orders.

To stop the rise in yields on Japanese government bonds, the Bank of Japan announced a second unexpected round of bond purchases. Before reversing course and closing at 142.50, USD/JPY hit a monthly high slightly under 144.00.

As expected, the Bank of England (BoE) raised its key rate by 25 bps to 5.25%, which is the highest level in 15 years. On the Monetary Policy Committee, there was a three-way split, with two members voting for a 50 bps increase and one member voting against it. Before the September meeting, there will be two monthly inflation data, so it is unclear what the BoE will do next. Following the decision, the pound had a mild decline, with the GBP/USD pair reaching its lowest point in nearly five weeks at 1.2620 before surging higher than 1.2700.

Language around the hike suggests the MPC is preparing to reach a terminal rate soon; economists continue to expect 25bps hikes in both September and November, but the probability of a November hike.

The AUD/USD pair finished moderately higher after falling sharply on the previous two days. The trend remains to the downside, but the pair was able to hold above 0.6500. The Reserve Bank of Australia (RBA) will release its Statement on Monetary Policy, including new macroeconomic forecasts.

The USD/CAD cable rose for the third day in a row but the bullish momentum faded. The pair was unable to break above June highs and retraced towards 1.3350. Canada will report employment data on Friday, with employment change expected to be positive at 21,100, following a surge of 59,900 in June; and the Unemployment Rate is expected to rise modestly from 5.4% to 5.5%.

USD/CHF declined after rising for five consecutive days, falling to 0.8730. Switzerland reported a decline in the annual Consumer Price Index (CPI) to 1.6%, the lowest since January 2022.

What to watch on Friday

Nonfarm Payrolls are expected to have increased by 200,000 in July, down from the 209,000 jobs that were reported in June. The average hourly wage is anticipated to increase at a pace of 4.2% annually, while the unemployment rate is anticipated to stay at 3.6%. These data will bring to a close a week of employment statistics that have so far only slightly softened. The NFP report will be keenly followed and is anticipated to cause market volatility.

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