Dow Rises as Falling Job Openings Boost Hopes for Fed Rate Cut | Daily Market Analysis

Key events:

• USA - Nonfarm Employment Change (May)
• USA - S&P Global Services PMI (May)
• Canada - BoC Interest Rate Decision
• USA - ISM Non-Manufacturing PMI (May)
• USA - ISM Non-Manufacturing Prices (May)
• USA - Crude Oil Inventories

The Dow closed higher on Tuesday as a significant drop in job openings to a three-year low pointed to weaker economic growth, raising hopes for a Federal Reserve rate cut later this year.

The Dow Jones Industrial Average increased by 140 points, or 0.4%, while the S&P 500 edged up 0.1%, and the NASDAQ Composite gained 0.2%.

April's job openings fell to a three-year low of 8.1 million, surprising economists who had expected an increase to 8.37 million.

This data indicating a slowdown in the labor market suggests that the economic strength observed earlier this year might be diminishing. Given that the Fed has previously indicated that a weakening labor market would be a prerequisite for easing rates, the probability of a rate cut in September surged to 55% from 44.9% last week.

Treasury yields dropped on heightened hopes for a rate cut this year, with the yield on the 10-year Treasury note falling by 6.6 basis points to 4.333%.

This latest update on job openings comes just ahead of the nonfarm payrolls report due on Friday and the Fed's meeting next week.

The EUR/USD pair extended its rebound from the 1.0860-1.0855 region during the Asian session on Wednesday, benefiting from subdued US Dollar activity. Currently, spot prices are just shy of the 1.0900 level, staying close to the highest point since March 21, which was reached on Tuesday.

Recent softer US economic data have hinted at a cooling economy, strengthening the case for a potential interest rate cut by the Federal Reserve later this year. This outlook has kept US Treasury yields low, weakening the USD and supporting the EUR/USD pair. However, gains may be capped as traders await the crucial European Central Bank monetary policy meeting on Thursday. Policymakers have recently indicated a likely 25 basis point rate cut at the June 6 meeting, marking the first reduction since March 2016. This meeting will also feature updated economic projections, and ECB President Christine Lagarde’s comments will be scrutinized for signals about future rate cuts in response to rising Eurozone inflation in May. These elements will significantly influence the EUR/USD pair.

The Australian Dollar has also been rising, possibly due to improved risk sentiment on Wednesday. However, the AUD's gains could be limited by disappointing Gross Domestic Product data, which showed a 0.1% QoQ increase in the first quarter, below the anticipated 0.2%. On an annual basis, the economy grew by 1.1%, slightly under the expected 1.2%. The AUD/USD pair was pressured as the Judo Bank PMI came in at 52.5, lower than the expected 53.1 for May.

Reserve Bank of Australia Governor Michele Bullock stated on Wednesday that she expects GDP growth for the first quarter to be quite low. She also emphasized that the central bank is prepared to act if the CPI does not return to the target range, as reported by NCA NewsWire.

Gold prices faced renewed selling pressure on Tuesday, falling to the $2,316-2,315 area, closer to a multi-week low reached the previous day, due to modest US Dollar strength. The USD’s recovery from a two-month low lacked momentum, with increasing acceptance that the Federal Reserve will cut interest rates later this year, supported by softer US economic data. This expectation has kept US Treasury yields low, benefiting the non-yielding yellow metal during the Asian session on Wednesday.

Geopolitical risks from ongoing Middle East conflicts also supported the safe-haven Gold price, bringing it closer to the 50-day Simple Moving Average. Despite these supportive factors, XAU/USD remains confined within a one-week trading range as investors are hesitant to place aggressive directional bets ahead of the crucial US nonfarm payrolls report due on Friday.

The USD/JPY pair strengthened near 155.30 during early Asian trading hours on Wednesday. The interest rate gap between the Fed and the Bank of Japan continues to favor the pair. Japan’s Labor Cash Earnings rose 2.1% YoY in April, up from the previous 1.0% increase (revised from 0.6%), exceeding market expectations of 1.7%. With labor cash earnings rising faster than expected, the BoJ may face pressure to begin tightening its easy monetary policy stance, which has exerted some selling pressure on the JPY throughout 2024. Meanwhile, the interest rate differential between the US and Japan continues to weaken the JPY, capping the downside for the USD/JPY pair.

On Tuesday, BoJ Deputy Governor Ryozo Himino stated that the central bank must be "very vigilant" about the impact of the JPY's movements on the economy. Himino added that the Japanese Yen's weakness will be a factor in determining the timing of its next interest rate hike.

Market focus will shift to the release of the closely-watched US monthly employment data, known as the NFP report, on Friday. This key US jobs data could influence expectations about the Fed’s next policy move and the USD.