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Market Insights

Dollar Strong For Now - NFP Key Tomorrow

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The dollar’s perked up early in 2023. EURUSD started the year with a 1.07 handle and now trades 150 pips lower. Tomorrow’s NFP report is likely to be a high impact data release alongside the ISM Services data.

Let’s start with the chart. EURUSD had been pushing higher through Q4, but might be running out of steam now.

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It’s important not to extrapolate too much from trendline breaks. Sometimes they can be consequential, as we saw in October last year. Others can be false breaks as shown below…

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Context is king, and this latest move in the dollar is worth monitoring, especially in the context of the wage growth ‘problem’ we mentioned here. In theory, the more resilient the economy, and the more that labour market strength endures, the higher the Fed will have to push US interest rates, potentially strengthening the dollar in the process.

JP Morgan’s view from the article (emphasis added):

Signs of slowing activity in the west, and a return to full production in China, should ease inflation through the course of 2023, with the shrinking contributions from energy and goods sectors in particular helping price pressures to moderate in the months ahead.

However, to be sure that we’re out of the inflationary woods, wage pressures also need to ease. This is where the central banks went wrong in assuming inflation would prove “transitory”, as they underestimated the extent to which labour market tightness would result in workers asking for more pay.

Early signs point to a labour market that continues to be robust. Job openings remain persistently high according to the JOLTS data released this week:

The number of job openings was little changed at 10.5 million on the last business day of November, the U.S. Bureau of Labor Statistics reported today. Over the month, the number of hires and total separations changed little at 6.1 million and 5.9 million, respectively. Within separations, quits
(4.2 million) and layoffs and discharges (1.4 million) changed little.

The ADP report partially reinforced the strength. Private sector employment increased by 235,000 jobs in December and annual pay was up 7.3% year-over-year.

However, the wage data didn’t completely back this up:

December ushered in the largest decline in pay growth for job stayers in the three-year series history. Leisure and hospitality; trade, transportation and utilities; and information sectors had the sharpest declines in pay gains. Job changers’ pay growth also fell to the lowest level in 10 months.

Now, if wages and inflation drop together, the Fed might achieve that ‘soft landing’ and a convergence of global rates could see the dollar weaken further.

The most recent Fed Minutes add further context for employment and wage data:

“Participants commented that labor demand had remained strong to date despite the slowdown in economic growth, with __a few remarking that some business contacts reported that they would be keen to retain workers even in the face of slowing demand for output because of their recent experiences of labor shortages and hiring challenges.__”

If tomorrow’s NFP data and the ISM Services employment sub-index reinforce the idea of labour market strength, we could see stocks under further pressure, and the dollar ascending to the throne once more…

Not investment advice. Past performance does not guarantee or predict future performance.

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