• Dollar gains as ADP jobs report beats estimates
• Yen falls on prime minister Ishiba’s dovish remarks
• Pound collapses after BoE’s Bailey warns about faster cuts
• Wall Street virtually unchanged, gold retreats, oil extends gains

US data allow dollar to extend latest recovery

The dollar extended its gains against its major peers on Wednesday and during the Asian session Thursday. Although there was no further escalation in the Middle East, fears of retaliation by Israel, as well as data corroborating the view that another bold cut by the Fed may not be necessary, allowed dollar bulls to stay in the game.

Yesterday, the ADP employment report showed that private payrolls increased by more than expected in September, adding to evidence that the labor market is not slowing as previously expected. The report comes on top of Tuesday’s JOLTS job openings data, which revealed that there were 1.13 openings for every unemployed person in August, up from 1.08 in July.

The upbeat employment data encouraged market participants to scale back their aggressive rate cut bets, with the probability of a back-to-back 50bps cut by the Fed in November sliding to 35%. The total number of basis points worth of rate reductions by the end of the year was also reduced to 70 from 75.

Today, as they seek more evidence about how the Fed may proceed , investors may pay attention to the initial jobless claims for last week and the ISM non-manufacturing PMI for September.  However, the highlight is likely to be tomorrow’s nonfarm payrolls report.

Although Tuesday’s and Wednesday’s data are implying some upside risks, traders may remain cautious as history has shown that the ADP figure is far from a reliable predictor of the NFP print. What’s more, on Monday, the ISM manufacturing PMI survey revealed that employment in the sector deteriorated further during September.

Yen, euro and pound tumble on dovish commentary

The yen was Wednesday’s main loser as Japan’s new prime minister Ishiba said that the nation is not ready for additional rate hikes. Ishiba, who secured the leadership of the Liberal Democratic Party (LDP) on Monday and was appointed as prime minister on Tuesday, was initially seen by the markets as a monetary hawk. Thus, his latest remarks served as a disappointment, with the probability of another 10bps hike by December dropping to around 45%.

The euro slipped to a three-week low against its US counterpart after ECB member Isabel Schnabel, who used to be an outspoken hawk, said that inflation in the Euro area is increasingly likely to ease back to their 2% target. Following Lagarde’s remarks that their confidence about inflation returning to target will be reflected at the next gathering, Schnabel’s comments allowed investors to continue seeing 25bps rate cuts in October and December as a done deal.

Today, it was the pound’s turn to tumble as BoE Governor Bailey said in an interview with the Guardian that they could turn “a bit more activist” on interest rate cuts if data continues to suggest progress in inflation. The market is now nearly fully convinced that a quarter point cut will be delivered in November, assigning a 65% probability for another one in December.

Stocks steady ahead of tomorrow’s payrolls, gold pulls back

On Wall Street, all three indices closed virtually unchanged as fears that Israel may retaliate against Iran soon did not allow investors to cheer data pointing to decent performance of the US labor market. That said, should tomorrow’s official jobs report confirm the notion of a decently performing market, equities could rebound, even if this means fewer Fed rate cuts down the road.

Gold pulled back as the further strengthening of the dollar is making bullion more expensive for other currency holders, but amid escalating tensions in the Middle East, the prevailing uptrend is likely to stay intact.

Oil extended its gains, corroborating the view that investors remain cautious about geopolitics. That said, black gold briefly moved above the key resistance zone of $72.70 and then quickly pulled back.