Dollar Down – Will ISM Make of Break It?

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Market Drivers January 7, 2019
German data mixed
All eyes on ISM Non-Manufacturing
Nikkei +2.44% Dax 0.05%
Oil $49/bbl
Gold $1290/oz.

Europe and Asia:
EUR GE Factory orders -1.0% vs. 0.1%
EUR GE Retail Sales 1.1% vs. -0.9%

North America:
USD ISM Non-Manufacturing 10:00

The dollar was weaker across the board on the first trading day of the week inching towards the 108.00 figure against the yen while EURUSD pushed towards 1.1450 in London morning trade.

Despite better than expected NFP data, along with the beat on average hourly wages, the markets remain skeptical about any further rate hikes from the Fed, given financial turmoil in the markets in December. December turned out to be one of the worst performing months for US equities in recorded history and the lingering sense of fear and uncertainty remains even as the economic data continues to show strong growth.

One key issue for investors is that labor data tends to be a lagging indicator while PMI and ISM surveys often pick up changes in future demand at a much faster pace. To that end, the very sharp drop in ISM Manufacturing which fell to 54.1 – the largest one month drop since Lehman collapse in 2008 – continues to impact sentiment much more than the upbeat labor data.

Therefore, today’s ISM Non-Manufacturing report expected to come in at 59.7 looms large in the market’s psyche. Services comprise more than 70% of the US economy and if the data disappoints it could signal a much broader weakening in the US economy that could trigger yet another wave of risk aversion flows in equities and quickly drag USDJPY below the 108.00 level.

Meanwhile, the slow drip lower in US yields continue to help other G-10 currencies rally against the buck with antipodeans continuing to perform well as both Aussie and kiwi remain bid on the day. If ISM data prints weaker than the forecast that trend could continue as the day proceeds with kiwi pushing towards.6800 Aussie moving through .7150 while EURUSD could rally towards the psychologically key 1.1500 barrier which has served as a cement ceiling resistance since November of last year.

Boris Schlossberg
Managing Director

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