US Dollar Fades Despite Strong Jobs Report
The US dollar failed to rally despite a very strong Jobs Report.
305k jobs were added last month, much more than anyone expected.
However, jobs data may not matter to the Fed’s plans to cut rates.
The US dollar is making a tentative rally of just 0.06% on Monday in a flat market. It may not seem significant, but it is notable as the exchange rate in most dollar pairs is some way below last week’s peak and around the same level as it was before Friday’s Jobs Report was released. In other words, the dollar failed to rally despite the very strong release which saw the headline figure come in at 305k, around 50% higher than estimates of 210k.
Out of 74 analyst forecasts, no-one expected a figure as high as this. Moreover, previous readings were revised upwards and the unemployment rate dropped from 3.9% to 3.8%. This was a very strong report and it dented hopes of rate cuts from the Fed. The odds for a cut in June slipped to just 46%. Meanwhile, long-term yields pushed higher and the 10-year now sits at 4.379%. All of this is positive for the US dollar, which makes it odd that it remains at lower highs and EURUSD is holding above 1.08.
“It is quite surprising to see EUR/USD trading above 1.08. US rates markets have reacted to the jobs data, but FX markets have not. However, given that two-year EUR:USD swap differentials are now 150bp in the dollar’s favour, the pressure for sub 1.08 levels is clearly building,” note ING.
Some Concern of the Finer Details
Away from the massive headline beat, there were some subtle signs of weakness in the Jobs Report which may prevent the dollar rallying. Firstly, the growth in jobs is primarily driven by sectors such as government, health care and leisure/hospitality. These are not usually associated with broad economic growth and job growth in sectors such as manufacturing; technology and transport are mostly flat. Secondly, the household survey continues to post worrying numbers. As ING point out,
“…the household survey shows that full-time employment fell for the fourth consecutive month (to 132.94mn) which leaves us at the lowest level of full-time employment since January 2023 while part-time employment rose to an all-time high of 28.632mn. Once again, this suggests the details paint a slightly weaker picture than the headlines alone suggest.”
Does it Even Matter?
While the Jobs Report understandably gets a lot of attention, its effect on markets may have been lessened by the Fed’s stance on cuts and data.
Jobs data has been strong all year and many thought it may get the Fed to shift hawkish again or at least take rate cuts off the table, especially since inflation has also bounced back. However, the last FOMC meeting at the end of March showed no concern with the data and no intention of delaying cuts. Indeed, Chair Powell was asked a direct question on whether recent data would delay cuts and he answered, “not necessarily,” which suggests Friday’s Jobs Report will not have any influence.
This seems the main reason why the dollar is right back at where it was before the Jobs Report was released. The Fed will not change plans to cut because of hot labour data. However, inflation data may be harder to ignore and Wednesday’s CPI release could be a major driver for dollar prices. A 0.3% month-on-month print is expected which would take the year-on-year to 3.4%. A higher reading than this would surely make the Fed quite uncomfortable with its stance to cut rates as early as June and could boost the US dollar to new 2024 highs.
Source link