Positive NFP Report Raises Odds of another Fed Rate Hike in September

Sept. 6, 2018 (Western Union Business Solutions) – The dollar turned broadly positive after America’s jobs report surprised to the upside and showed the fastest wage growth in years, an outcome that put more U.S. rate hikes more firmly on the table. America added 201,000 jobs in August, a marked acceleration in hiring from a revised increase of 147,000 in July. Unemployment steadied at 3.9%. What stole the show for the dollar was the 2.9% annual rise in wages, a print consistent with inflation exceeding the Fed’s optimal rate of 2%. As a result, the Fed is all but certain to raise rates on Sept. 26 and likely again on Dec. 19. Bullish fundamentals, coupled with rising trade war fears, could prove a cocktail of U.S. dollar outperformance. Next week brings U.S. consumer inflation on Sept. 13 and retail sales the following day.

 

EUR

 

The euro was very little changed on the day and for the week against the dollar with few staking big bets ahead of America’s monthly jobs report. Italian-related headwinds on the euro subsided this week on signs that Rome’s new coalition government might play by the fiscal rules when it unveils its 2019 budget over coming weeks. Next week looms potentially large for the euro when the ECB issues a policy decision on Sept. 13. The central bank has seemingly ruled out a rate hike this year, putting the focus on officials’ level of confidence in the 19-nation economy. An upbeat assessment despite trade uncertainties would risk pushing the euro higher over the short run.

 

GBP

 

Sterling popped to one-week highs ahead of America’s influential jobs report, underpinned by cautious optimism in the U.K. and EU eventually sorting out their differences to reach a trade deal that helps to avert a hard, economy-squeezing exit from the bloc next year. While U.K. data was mixed this week, the most important indicator – services growth – showed a faster pace of expansion. While the news is unlikely to allow the Bank of England, which meets on Sept. 13, to contemplate an imminent rate hike from 0.75%, it was enough to temper negative sentiment toward the pound. Data on Sept. 11 will offer an update on U.K. unemployment whose 4% rate is the lowest in four decades and a source of sterling strength.

 

AUD

 

The rally in the U.S. dollar is alive and well versus its Australian counterpart which tumbled to 2 ½ year lows. The Aussie has been plagued by rising fears of the U.S. and China heading for a full-blown trade war. That spells bad news for Australia’s economy as it relies on global commerce as a chief growth engine. Moreover, expectations for U.S. and Australian interest rate differentials to widen further in the former’s favor is another source of negativity for the Aussie, particularly after the Reserve Bank of Australia this week flagged low rates for longer. Australia’s job market will be in focus next week. If unemployment on Sept. 13 holds around 6-year lows of 5.3% it could help spark a recovery in the Aussie.

 

CAD

 

Canada’s dollar turned lower after a dismal August jobs report made an October rate hike less likely. Canada shed more than 50,000 jobs in August which compared to forecasts of a modest gain (5K) which pushed up unemployment to 6% from a four-decade low of 5.8%. While all the job losses came from less desirable part time hires, wage gains moderated to a 2.6% annual rate from 3% in July, reinforcing the report’s weaker tone. The Bank of Canada this week reaffirmed that data hold the keys to the policy outlook. Consequently, today’s influential jobs report will deal a blow to expectations of an Oct. 24 rate increase to 1.75%, which is loonie-negative. Nevertheless, any constructive news on Nafta negotiations should help to slow the loonie’s jobs-induced descent.

 

 


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