U.S. Dollar Awaits Nonfarm Payrolls As Recession Worries Mount
XM Group | Aug 03, 2022 08:01AM ET
Is it a recession?
The US economy has now contracted for two consecutive quarters, a situation we used to call a technical recession. In fact, business surveys suggest the picture has deteriorated further in the third quarter, as the cost of living crisis keeps squeezing consumers and soaring interest rates have kneecapped the housing market.
Yet both the Federal Reserve and the White House insist this is not a ‘real’ recession, since we haven’t really seen companies shutting down or any widespread job losses. They argue that the economy cannot be in recession with the unemployment rate near a five-decade low.
The problem with that logic is that they are looking into the past to justify how strong the economy is. Labor market indicators are typically the last domino to fall - the jobs market always looks great just before a slump. It’s a backward-looking measure.
Instead, what is needed to truly curtail dollar strength is an improvement in the growth outlook for Europe and Asia. This will require lower energy prices, or at least stable prices for some time. OPEC meets this week but there is mounting speculation it cannot produce much more even if it wanted to.
As such, any trend reversal in the dollar might have to wait until there’s a ceasefire in Ukraine, which doesn’t seem imminent. Until then, it’s difficult to argue with the trend in euro/dollar and if sellers reclaim control, their first battle could be around the 1.01 region.
Finally, note that the ISM services PMI will also be released on Wednesday and might be crucial in setting market expectations ahead of the employment report.
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