Dollar is back on growth track thanks to hawkish NFP, possible upside surprise in January CPI
The surprisingly strong NFP report for January markedly eased pressure on the dollar as it reminded that the Fed is likely to lead a hawkish policy reassessment by the central banks of major economies. After release of the report, the two-year US bond yield surged by 9 bp to 1.3%, indicating that the report made a strong impression on the market, in particular due to low expectations after gloomy ADP print:
The strong labor market report also lifted the chances of a 50bp rate hike by the Fed from 8.5% to 32.7%:
Speaking about which currencies are more vulnerable to declines against the dollar than the rest in the current central bank tightening environment, it’s reasonable to focus on JPY and CHF. Central banks here are the least likely to react to inflation-related developments due to the long period of deflation and the fear of reacting too soon, breaking off the desired trend. The euro suddenly gained more resilience as the ECB took a big step towards tightening policy last week, after which short-term rates shot up (yield on 2-year German Bunds from 0.05% to 0.25%) due to which demand for cash rose. Over the weekend, the comments of the ECB official Knot turned out to be interesting, as they can shed light on the fate of EURUSD in the medium term. He said that it is possible to see ECB rate hike by 25 bp in October followed by increment hikes of 25 bp. The underlying market expectation after the ECB meeting is now the outcome, where the central bank will be raising rates by 10 bp starting from July. In addition, Knot said that inflation in the Eurozone is mainly generated by fuel prices, while in the US it is the result of rising consumption; it follows that the tightening cycle in the US may be more pronounced than in Europe. Therefore, we can assume that the breakdown of EURUSD towards 1.15 most likely will fizzle out soon and the price may soon look for reversal points. Sell-off in USD pairs, including EURUSD, may resume this week, in particular after the release of CPI in the US for January. Strong growth should increase the chances of a 50 bp Fed rate hike in March, which, in fact, is now the main potential driver for the recovery of the dollar. EURUSD is likely to test support at 1.1380 ahead of the CPI report, as the chances of a positive surprise in the data are high, especially in light of January's wage growth picking up to 0.7%, as shown in the NFP report.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The surprisingly strong NFP report for January markedly eased pressure on the dollar as it reminded that the Fed is likely to lead a hawkish policy reassessment by the central banks of major economies. After release of the report, the two-year US bond yield surged by 9 bp to 1.3%, indicating that the report made a strong impression on the market, in particular due to low expectations after gloomy ADP print:
The strong labor market report also lifted the chances of a 50bp rate hike by the Fed from 8.5% to 32.7%:
Speaking about which currencies are more vulnerable to declines against the dollar than the rest in the current central bank tightening environment, it’s reasonable to focus on JPY and CHF. Central banks here are the least likely to react to inflation-related developments due to the long period of deflation and the fear of reacting too soon, breaking off the desired trend. The euro suddenly gained more resilience as the ECB took a big step towards tightening policy last week, after which short-term rates shot up (yield on 2-year German Bunds from 0.05% to 0.25%) due to which demand for cash rose. Over the weekend, the comments of the ECB official Knot turned out to be interesting, as they can shed light on the fate of EURUSD in the medium term. He said that it is possible to see ECB rate hike by 25 bp in October followed by increment hikes of 25 bp. The underlying market expectation after the ECB meeting is now the outcome, where the central bank will be raising rates by 10 bp starting from July. In addition, Knot said that inflation in the Eurozone is mainly generated by fuel prices, while in the US it is the result of rising consumption; it follows that the tightening cycle in the US may be more pronounced than in Europe. Therefore, we can assume that the breakdown of EURUSD towards 1.15 most likely will fizzle out soon and the price may soon look for reversal points. Sell-off in USD pairs, including EURUSD, may resume this week, in particular after the release of CPI in the US for January. Strong growth should increase the chances of a 50 bp Fed rate hike in March, which, in fact, is now the main potential driver for the recovery of the dollar. EURUSD is likely to test support at 1.1380 ahead of the CPI report, as the chances of a positive surprise in the data are high, especially in light of January's wage growth picking up to 0.7%, as shown in the NFP report.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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