• US Nonfarm Payrolls data is likely to report 225K in June vs. 339K seen in May.
• The headline NFP and Average Hourly Earnings are key to the Fed’s rate hike outlook.
• US Unemployment Rate is seen a tad lower at 3.6% in June from May’s 3.7% reading.

Following the releases of significant US employment data in the holiday-shortened week, the US Dollar (USD) is geared up for the all-important US Nonfarm Payrolls report due this Friday, which will likely lead to a recalibration of the US Federal Reserve (Fed) rate hike bets in the second half of this year.

Renewed US-China trade tensions, combined with mounting recession fears in the world’s largest economy, are helping the US Dollar find its feet heading toward the highly-anticipated US labor market data. Absent Fedspeak, thin trading and weak US ISM Manufacturing PMI data weighed on the Greenback in the early part of the week.

On Monday, the ISM Manufacturing PMI in the United States shrank for eight consecutive months to 46.0 in June, hitting the lowest level since May 2020. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that “the health of the US manufacturing sector deteriorated sharply in June, fueling fears that the economy could slip into a recession in the second half of the year.”

In response to the data, the closely-watched spread between the 2-year and 10-year US Treasury bond yields hit the widest since 1981, a deeper inversion than the one witnessed in March during the US regional banking crisis. The yield differential between 2 and 10-year Treasuries has been inverted since last July so Monday’s inversion is not unusual but the magnitude of inversion is a signal that a US economic recession is inevitable.