Goldman Sachs: Moderate U.S. Job Gains Should Keep Dollar On Back Foot

Goldman Sachs note that "the U.S. economy added 559k jobs in May and the U3 unemployment rate edged down to a recovery low of 5.8%. But the latest employment report missed market expectations (which were elevated after the earlier ADP result), and did little to dispel concerns that supply frictions are holding back the labor market recovery. Indeed, the U.S. labor force participation rate declined slightly during the month, and the employment-to-population ratio increased by just one tenth. We expect that the report will ease market concerns about an earlier-than-expected wind down of the Fed's asset purchases, even if it does not entirely eliminate the possibility of a September taper announcement. The combination of steady Fed expectations and a broadening global economic recovery should allow recent USD weakness to continue. Our preferred expression remains long EUR/USD, with a target of $1.25. Rebounding economic activity and equity inflows have provided a tailwind to the single currency; issuance of Recovery Fund bonds, which is set to begin soon, could also result in official demand for EUR. This week's ECB meeting will be the next major risk event; our economists expect the governing council to retain language indicating a "significantly higher" pace of asset purchases compared to early in the year. Besides the Euro, a more benign U.S. real rate backdrop should be supportive of a variety of EM crosses as well. EM currencies should benefit over the coming months from cheap valuations, a rebuild of carry from central bank rate hikes, and the vaccine-led cyclical reopening."