FX Update: Risk sentiment eyes US data, EU reply to BoJo Brexit plan

The narrative here is that weak data is driving the latest sell-off in risk sentiment, even if a number like yesterday’s small miss on the US ADP payrolls number is far too insignificant a data point to have driven the degree of weak risk sentiment we saw yesterday. I would suspect that the move through technical, flow-generating levels are behind the scale of the move yesterday and can’t help but think that the beginning of the quarter may be involved here as well (remember last years major sell-off began on trading day 1 of Q4).

Regardless, if the US data is driving the narrative, then we have two more important data points dead ahead, today’s US ISM Non-manufacturing survey, which registered a large bounce to 56.4 in August and is expected today at 55.0, and tomorrow’s Nonfarm Payrolls Change. On the ISM non-manufacturing survey, I would lean for more risk of a negative surprise, given the odd jerk higher in the August survey from July’s 53.7 and the Markit survey showing a weak 50.9 in August. Safe to say that anything lower than 53 or so will spook the market, as it re-establishes the downward trend suggesting decelerating growth in the services sector. On the US payrolls change tomorrow, a consistent pattern of negative revisions of prior months’ data and the very weak ISM Manufacturing employment subcomponent could drive the first significant miss in the payrolls number in a few months (remember that the private payrolls number is gaining in important for a time as 2020 US census hiring is picking up into next year.)

Judging from the last two days of action, continued weak risk sentiment will drive a strong G3 trio, with the USD the weakest within that trio, while seeing various degrees of weakness elsewhere, and especially EM at risk if the general deleveraging keeps up pace. One interesting thing to note is that the US yield curve has steepened the most in a while on the last couple of days of market action as the market prices in more aggressive rate cuts. The Fed struggling to keep up with the needed amount of easing and a steepening yield curve have often been associated in the past with bear markets in equities.

The September UK Services PMI out this morning dipped below 50 again after doing so in March before dribbling back above 50 for a few months. This is likely not the last time we see a sub-50 print suggesting a contracting UK services sector, judging from the weak credit impulse that suggest weak growth out at least another two-three quarters.

Chart: EURUSD
The EURUSD is trying to turn around here, but bulls really need a sharp leg higher into 1.1075-1.1100 to reverse the downward momentum and argue for a turn in the chart. We are open-minded here, as US data risks dragging the US dollar down versus the other highly liquid currencies, chiefly the EUR and JPY.