In European markets, investors are focused towards the Greek third bailout package and the negotiations between the two parties, Greece and its creditors, are falling apart already. The IMF is being a strong arm at this occasion and making sure that no one bully’s them towards the third bailout package for Greece unless, of course, all of their conditions are met. The Greek debt situation is really bringing back the bad memories for them when the fund was forced to give more money to Argentina knowing that the country is only buying time at a very expensive cost. The IMF surely does not want the same situation taking place again and it is resisting to all external pressure.
For them, the rules are very simple, the bailout funds are there to help the country so that they can stand on their own, not to aid them to buy more time at a very expensive cost. Therefore, unless Greece gets a substantial debt relief which makes their debt level more manageable, the IMF is refusing to help the country or participate in any of the bailout package. However, the reality is very different, because Germany will never allow any kind of debt relief, but yes, they will restructure their debt- for now. The deadline of August 20th is approaching fast and Greece needs to make a payment of 3.2 billion euro.
Back in the U.S., it was all about the interest rate hike speculations which were spooked by the Hawkish member of the FOMC voting member, Dennis Lockhart. He confirmed that the resistance is very low for not raising the interest rate and there are no excuses to not to raise the borrowing rates. His comments were unscheduled, but his tone is very much known to traders. Nonetheless, the market participants reacted to his comments as this was the first time they have heard any hawkish comments and this has pushed the DXY index towards its four months high. Investors are still very cautious ahead of the big day, which is on Friday- the U.S. Non Farm payroll data.
As we have said over and over during the past couple of weeks, the two most significant elements on Friday are wage growth and participation number. The headline number may not matter that much, but the underlying elements will certainly add or subtract the U.S. interest rate expectations. If we do see an increase in the wage growth and in the participation rate, this will confirm that there is less slack in the economy and wage growth will outpace the deflationary pressure in the long term. However, if we do see a strong headline number for the U.S. NFP, but the underlying components do not improve, that could be dollar bearish news. But, before that, we have the ADP reading, trade balance number for June and ISM services number for July. The forecast is 216K for the ADP reading, which is a lower number as compared to the previous number of 237K. The forecast for the U.S. trade balance and ISM non manufacturing PMI are -42.8B and 56.3 respectively.
All these readings will provide a much better clue about the U.S. NFP data, due on Friday with a forecast of 220K. If we do see strong reading for the ISM non manufacturing and ADP, it will very much anchor expectations that the Friday number will be robust. A positive reading could further push the dollar higher and a weaker reading will could trigger profit taking.