US Dollar ignores hawkish Fed as eyes turn to nonfarm payrolls release

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2 February 2018

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The US Dollar lost further ground against its major peers during London trading on Thursday, just a day after the Federal Reserve upgraded its inflation assessment and hinted that interest rates were likely to be raised again at its March meeting. Currency traders will now look ahead to this afternoon’s nonfarm payrolls report.

T
he Fed kept interest rates unchanged on Wednesday evening, although its optimistic appraisal of economic conditions in the US caused investors to ramp up expectations for another hike at its next meeting in March. Markets are now pricing in effectively a 100% probability of a move next month, making yesterday’s slide in the Dollar all the more surprising. Investors are continuing to ignore the potential for a widening in interest rate differentials between the US and almost every other major economy, with the US Dollar index still languishing around a three year low.

Economic news out of the US yesterday was also very impressive, making the currency’s decline all the more surprising. The ISM manufacturing index beat expectations, coming in at 59.1. Initial jobless claims fell to a near four decade low 230,000, while construction spending rose to a record high after increasing 0.7% in December. A fall in stock markets globally was instead cited for the Dollar’s drop with investors continuing to avoid the greenback in favour of safer assets, namely the Yen.

This afternoon’s nonfarm payrolls report is seen as the most significant economic data release of the month. Consensus is for a solid headline number around the 180,000 mark. In our view, even a disastrous report is unlikely to derail another interest rate hike from the Fed in March, but it could take a very strong one in excess of the 200k mark to reverse the current trend of Dollar weakness.

UK manufacturing activity slips to seven month low

Sterling shrugged aside a disappointing manufacturing PMI to end over half a percent higher against the US Dollar, edging back towards its highest position in a week. An easing in Brexit concerns and an expectation that the Bank of England would take on a slightly more optimistic stance during its meeting next week ensured that sentiment towards the Pound remained strong, even amid a weak set of data. The manufacturing PMI slipped to 55.3 last month from the 56.2 recorded in a month previous, its lowest level in seven months.

The Euro also made a fresh change to last week’s three year high, rallying back towards the 1.25 level against the US Dollar following further evidence that the Euro-area economy was booming entering in to the New Year. Yesterday’s Eurozone manufacturing activity index was confirmed at a sky high 59.6, reinforcing the view that the economy is expanding at a pace that has far exceeded expectations.

With no economic news of note out of the Eurozone today, the common currency is likely to be driven by today’s nonfarm payrolls report in the US.