alse Illusions
On Friday last week markets had got very exuberant over comments made by the Federal Reserve Chair the day prior. As a result of the interpretation of those comments, the US Dollar had dropped several cents to trade at its recent lows. There was a narrative that was being pieced together and justified that the end of the US tightening cycle could be drawing ever closer. There is definitely some truth to that narrative and we are approaching the time where US rates will peak and begin to reside. However, it seems the market may have got somewhat carried away last week and overreacted to any forthcoming shift in policy.
When the non-farm payroll data dropped on Friday afternoon that illusion rapidly disintegrated. As a result of it being revealed that a mere sixty-three thousand jobs in excess of the forecast were created in the US in November, the Dollar came surging back from its newfound weakness. Of course employment will play a role in determining when the peak of US rates is reached for two reasons. Firstly, the age old inverse relationship between unemployment and inflation will directly impact the Fed’s primary price level mandate. Secondly, thanks to the Fed’s broad mandate, stronger employment figures can justify stronger inflation tackling measures. However, such a small out performance in non-farm payrolls should not move the US Dollar as much as it did. The reason for this overreaction is that the US Dollar was most likely overpriced versus fundamentals moving into the data release.
The Dollar immediately rose in excess of one cent versus the Euro. The Dollar held onto the gains made on the back of the non-farm payroll data for much of Friday’s afternoon trading session. However, much if not all of that price surge in the Dollar had been eroded by the time European markets opened again yesterday. What can be taken forward from this event is that the market continues to fixate upon data, adding to the potential volatility we could see. It should be said that what had been fuelling USD weakness was not just the expectations for a Fed pivot. Expectations for the reopening of the Chinese economy and a dropping of the Covid-zero policy rules has been creating a risk-off environment where the Dollar can fall.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – Opportunity for a weaker Dollar
Charles Porter
Thu 1 Jun 2023
Opportunity for a weaker Dollar The passing of month-end allows markets an opportunity to reassess currency valuations. Despite a cooling off within the Dollar as forecasted following the agreement between the White House and Kevin McCarthy, month end flows yesterday showed favourable conditions for a short-term Dollar resurgence. The beginning of June coincided with headlines […]
Morning Brief – Did EURUSD miss the news?
Charles Porter
Tue 30 May 2023
Did EURUSD miss the news? Over the weekend, the President and the Speaker of the House of Representatives reached a much-awaited deal on the US debt ceiling. The impending constraint on debt could have forced the shutdown of government departments and precluded the US government from servicing costs and existing debts, triggering a default. The […]
Morning Brief – UK Wages
Humphrey Percy
Fri 26 May 2023
UK Wages Bank of England Governor Andrew Bailey yesterday warned of the pressure on wages that are threatening to lead to a wage price spiral as the effects of inflation on the cost of living together with the 12 consecutive interest rate rises that consumers have experienced. The market has not enjoyed the poor inflation […]
