Euro seeks parity against dollar, Lagarde's speech and US job report in focus

In early European trade Friday, the Euro extended its loss to parity against the dollar, remaining near two-decade lows amid fears of a Russian-induced energy crisis tipping the continent into recession, while the US dollar edged lower as attention will turn later in the session to the release of the latest monthly US job reports, which are expected to show the number of Americans in paid employment increasing modestly in June though not by as much as the number of jobs added in May.

Slowing US payrolls growth

There are over 11m vacancies in the US labour market that higher wages cannot fill. Despite rising inflation driving up the general cost of living, the participation rate remains remarkably low at 62.3%.

The labour market might see more people re-joining as prices continue to rise. Still, the most important question is if those 11.2m vacancies will begin to disappear as well?

Currently, the unemployment rate sits at 3.6%, slightly above the 2019 lows, and is expected to remain steady, with wages growing at a pace of just over 5%.

Weakening economic data

Recent ISM reports from June have shown increasing evidence that the US economy is weakening. Manufacturing's ISM employment component fell below 50 again to 47.3, the lowest level since August 2020. Service sector weakness also followed a similar pattern.

There is a strong possibility that we could be looking at a Fed funds rate that could double by the end of Q3 if employment remains strong. Nevertheless, next week's inflation numbers could derail that narrative.

Since there was no ADP report earlier this week to benchmark today's June payrolls report, the most compelling question is how long will it take before we see a decline in numbers?

According to ADP, employment slowed to 128k in May, the lowest number in 18 months. The reports will not be available until August while the calculation is readjusted. Therefore, it is unclear which jobs report accurately reflects US labour market conditions.

Fed's aggressive tightening

With numerous references to the word inflation in this week's minutes, Federal Reserve policymakers appeared determined to focus exclusively on fighting inflation while the prospect of a recession was not mentioned. As a result, US job numbers will primarily focus on how long it takes before higher rates and rate expectations start to affect hiring trends.

Lagarde's speech

The head of the European Central Bank, Christine Lagarde, will speak later in the session about the risks facing the global economy. The central bank is expected to raise interest rates later this month, yet the region's growth appears to be slowing. This speech will be carefully analysed for clues about what the bank is thinking.