The United States Dollar’s losing streak continues this morning after a wildly mixed non-farm payroll report for February.
Overview
While the headline figure of a gain of 275,000 jobs in February appears quite strong, January’s whopper of a number was revised down by more than one hundred thousand and the unemployment rate went up from 3.7% to 3.9%. Average hourly earnings also missed their expected gain of 0.2%, showing that wages may not necessarily be keeping pace with inflation. In response to this release, traders have now fully ‘priced in’ an interest rate cut from the Federal Reserve at June’s meeting, up until today not expected until July.
While it’s possible, given Jerome Powell’s testimony to Congress this week, that the Fed does begin easing interest rates as soon as June, in our view, it’s still more likely that the Fed continues its traditionally very cautious approach and holds rates steady until a bit later this year. Powell has said time and time again that the Fed is actually looking for some softer labor figures, and today’s release under the hood does fit that bill, but that doesn’t mean that the Fed will pivot any sooner. An unemployment figure of 3.9% is still considered ‘full employment’, and put into context, this unemployment rate is where the US was just five months ago – not as scary of a print as some may believe. Powell yesterday said the Fed is ‘close to’ having enough confidence to cut interest rates, and a softer jobs report simply fits within that narrative. We do not believe this morning will materially move the needle for the Fed by itself – February’s inflation data is needed first.
Elsewhere around the world, the Eurozone’s final GDP reading came in completely flat, as expected. The economic bloc’s growth prospectus continues to be stagnant at best. Canada also released its employment figures for February, doubling expectations and contrasting with a weak US figure. To sum up – as we’ve said, there are underlying cracks in the US economy, but so far, the Fed has done a remarkable job of stopping the damage from spreading, and there’s no reason to believe they’d change course now.
What to Watch Today…
JPY ⇑
Japanese Yen’s remarkable run continues this morning, gaining a further three quarters of a percent against USD after today’s softer jobs print. JPY has strengthened nearly three percent against the Buck in the last calendar week as traders reprice expectations for both the Fed and the Bank of Japan, the latter now expected to normalize its key interest rate later this month. Japanese currency officials have continued to keep a close eye on the historical weakness levels of the Yen, as well, and rhetoric alone has been enough to boost JPY so far.
GBP ⇑
Pound Sterling, capitalizing on broad Dollar weakness, is capping the week with a further half-a percent rally against the USD, bringing its weekly gains close to one and a half percent. The UK’s 2024 budget released earlier this week brought little in terms of market surprises, but discussion of substantial tax cuts has brought some much-needed optimism back to the British economic picture. As it stands now for cable, the Dollar may be a touch oversold, but upside potential for GBP does remain in play if it can pull itself out of recessionary territory this quarter.
