USD recovers despite weak economic data, but concern grows ahead of the NFP release on Friday

Fears for the US economy continue to grow in the wake of the banking crisis. On Tuesday, we saw US job openings fall, and today the ADP reported a less-than-expected increase in private employment. Manufacturing data also showed a greater contraction than expected.

But the USD has remained resilient, especially as wider economic concerns have strengthened its status as a haven currency.

The week started with a shock move by OPEC+ to cut crude production by some 1.5 million barrels per day. The markets initially responded to the inflation risk associated with higher energy prices, but that has all changed following the latest barrage of data.

With a slowing US economy, energy prices are less of a worry. Markets are more concerned with the speed and steepness of a potential slowdown. In a sign of the risk sentiment infecting the market, Gold has continued its strong recent run, with Credit Suisse predicting it will test long-term resistance at the record highs of 2020 and 2022.

The background story of diverging monetary policy between the Federal Reserve and the European Central Bank once again reared its head. It’s clear that the ECB will keep raising interest rates in the coming months, but today the President of the Federal Reserve Bank of Cleveland, Loretta Mester, told Bloomberg TV that it was too soon to tell if a May rate hike was needed, saying “we have a lot more data to get to and we’ll see as we get there what is happening in the economy.”

The USD initially slipped further against the EUR as markets priced in a higher-than-average chance that the Fed would keep interest rates on hold.

But recessionary fears are stalking the market again, and the USD has recovered – with its status as a haven currency coming to the fore – and the EUR/USD has dropped back below 1.09. It’s obvious that the market is now split, with some investors retreating to the USD while others are still clinging to the interest-rate mantra that has been driving the price for the past few weeks. This is not sustainable.

All eyes now turn to the US Non-Farm Payroll (NFP) data, which will be released on Friday. This also coincides with a public holiday in many countries, with volatility in the EUR/USD being a real risk due to lower-than-usual liquidity.  A reading that comes in much lower than expected could lead to some unusual activity across all the major pairs and push Gold even further.