Daily Market Update

USD Smashes on Strong Labor Data

December 08, 2023

The United States Dollar is set to wrap its first weekly gain in 4, trading quite positively to start this Friday morning.

Overview

The Dollar’s strength was reinforced at 8:30 by US employment data. Nonfarm Payrolls for the month of November rose 199K, above expectations of 185K. The real upside surprise came from the unemployment rate, which fell from 3.9% to 3.7% last month. Traders are – once again – reassessing their expectations for future Federal Reserve movements as the labor market clearly remains quite robust.

As we’re in the media blackout period customary before each meeting of the Fed, we won’t get their direct input on these figures until next Wednesday. Many voting members of the central bank including Chair Jerome Powell, however, have emphasized over the last month that the Fed does retain a slight bias toward further interest rate hikes rather than cuts and policy may not be tight enough. Markets have not necessarily believed that narrative, but today’s release plays directly into it and we believe it’s quite unlikely that the Fed will cut rates as soon as May, like a majority of bets believe. These bets haven’t shifted any huge amount this morning, but we expect throughout the day the odds of easing in Q1 and Q2 next year will decrease and continue to lift the Dollar.

When coupled with dovish rhetoric emerging from several other major central banks around the world, today’s price action is largely in line with our expectations. Markets were overzealous through November in calling for the immediate end of the Dollar’s dominance, and the US labor market’s continued (and admittedly surprising) strength is proving the Fed’s ‘cautious optimism right.

What to Watch Today…

 

JPY ⇓

Japanese Yen is losing ground today on the heels of the NFP print after the newly volatile currency appreciated against the dollar to the tune of nearly 3% during yesterday’s trading session. Bank of Japan Kazuo Ueda, during a Q&A session Thursday morning, seemed to imply that Japan’s negative interest rate policies could end as soon as January 2024. We, however, don’t necessarily believe that the historically cautious central bank will actually take action, especially as Q3 GDP showed a deeper contraction than expected at -2.9%.

EUR ⇓

After recovering some ground on weekly losses through yesterday’s trading session, the single currency is back on the back foot today on the heels of US employment data. The European Central Bank is also set to meet and release its latest policy updates next Thursday and is likely to signal they may consider cutting interest rates as early as March 2024 – ahead of the Fed. Though March may be too soon to expect cuts from the ECB, in our view, the central bank there is still likely to be one of the first in the world to switch materially from tightening to easing.

 

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