The United States Dollar is extending Friday’s major move stronger this morning, gaining further ground against all G10 currencies except the Japanese Yen
Overview
Friday’s blowout payroll figures, the strongest release since March of last year, sowed further doubts in investors’ minds that the Federal Reserve will cut interest rates substantially this year. US non-farm payrolls grew by a whopping 256,000 in December, well above expectations of an addition of 165,000. The unemployment rate also unexpectedly declined to 4.1% from 4.2%. This is, on the surface at least, good news for the US economy. The labor market is remaining stable, and it appears the Fed’s tightening cycle that the central bank wrapped up last summer did not damage US employment, which would pave the way for the goldilocks ‘soft landing’ that has been much discussed over the last couple of years.
This strong employment reading, however, has been coupled with a large equity and government bond selloff. Investors are now worried that the economic outlook for the US may be too good and prompt the Federal Reserve to hold interest rates steady through this calendar year, especially given the potentially inflationary impact of the incoming Trump administration’s trade and economic policies. Tech stocks in particular are leading the selloff today, and Nasdaq futures are down more than a percent this morning as a result. US interest rate swaps currently indicate that traders do not expect any further easing coming down the pipeline from the Fed until the second half of this year, and a 25 basis point interest rate cut is not fully priced into markets until September. Treasury markets are facing similar pressure, as benchmark 10-year yields traded above 4.8% early Monday morning for the first time in more than a year. The two-year note neared 4.5% as well, marking its highest rate since July. All these factors are continuing to compound in the favor of the Dollar in this very young year, and the Dollar Spot Index is at its highest since 2022 this morning. Rising oil prices are also worrying investors as the US leveled further sanctions against Russia, sparking fears of an oil-driven resurgence in inflation.
The economic calendar is quite busy both domestically and internationally this week. The US will see December’s CPI released Wednesday morning, largely expected by traders to show that progress against inflation may be stalling. The UK also will release CPI Wednesday and Q4 GDP Thursday morning.
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What to Watch This Week…
- US PPI, Tuesday 8:30AM
- US CPI, Wednesday 8:30AM
- UK CPI, Wednesday
- US Retail Sales, Thursday 8:30AM
- UK GDP, Thursday
- Monex USA Online is always open
GBP ⇓
Pound Sterling, the worst performer against USD so far this year, slid a further half a percent against the Buck this morning which takes its total year-to-date losses up to more than 3.5% in less than two weeks of trading. UK gilts continued to sell off this morning amid mounting concerns over the nation’s economic and fiscal outlook, and Sterling briefly touched its weakest point against USD since November of 2023 before rebounding slightly. Traders are nervously awaiting two key reports from the UK this week in CPI on Wednesday and a GDP reading on Thursday morning.
JPY ⇑
Japanese Yen is the sole winner against the Dollar in the G10 this morning as the potential for an overheating US economy sends traders looking for safe haven investments. Overnight volatility continues to grow in the USDJPY pair as both nations’ interest rate paths look quite unclear. The Bank of Japan meets January 24th, and the odds of an interest rate hike from the central bank that day are priced at essentially a coin flip. BoJ Deputy Governor Ryozo Himino will deliver a speech tomorrow as Japanese equity markets are closed today, and traders will be closely watching for any clues on the BoJ’s actions ahead of that key January 24th meeting.
