A stunning job market update from the U.S last week dashed hopes of an immediate monetary policy pivot by the Federal Reserve and revived the fortunes of the greenback. In the week spanning January 29 to February 2, the U.S. dollar gained against the euro, the British pound, the Australian Dollar as well as the Japanese Yen.
The Dollar Index, which measures the Dollar against a basket of 6 specific currencies viz the euro, the Japanese Yen, the British pound, the Canadian Dollar, the Swedish Krona, and the Swiss Franc also surged during the past week.
The Dollar Index which had closed at 103.43 on January 26 in the backdrop of mild PCE-based inflation readings, opened on Monday, January 29 at 103.47. On Tuesday, data released by the U.S. Bureau of Labor Statistics showed the number of job openings surging to 9.03 million in December, from 8.93 million in the previous month. The highest reading in three months far surpassed the market consensus of 8.75 million, revealing the strength of the labor market.
On Wednesday, the Federal Reserve, in its first monetary policy review of the year maintained the target range for the federal funds rate at 5.25 to 5.5 percent, not deeming it appropriate to cut, until it had gained greater confidence that inflation was moving sustainably toward 2 percent. The Committee acknowledged the elevated inflation, the economic activity that has been expanding at a solid pace, the low unemployment rate as well as the strong job gains, and in effect downplaying expectations of early rate cuts.
The ISM Manufacturing PMI for January from the US released on Thursday improved to 49.1 in January, from 47.1 in December. The highest reading since October 2022 far exceeded market forecasts of 47 and supported the greenback.
Finally, Friday's non-farm payrolls data showed that the U.S. economy added 353 thousand jobs in January, compared with an upwardly revised 333 thousand in December, and way above market forecasts of 180 thousand. Contrary to market expectations of a rise to 3.8 percent, the unemployment rate in the U.S. was steady at 3.7 percent. The Dollar surged as the biggest rise in employment in a year, signaled a tight labor market and cast doubts on the Fed's ability to ease interest rates.
Amidst the wide gap between the market's expectations and the actual jobs data, the Dollar Index whipsawed on Friday, recording both the week's high of 104.04 as well as the week's low of 102.90. The index eventually closed at 103.92, recording a weekly gain of 0.47 percent.
The EUR/USD pair dropped 0.63 percent during the week ended February 2, amidst the Dollar's strength caused by the robust labor market update from the U.S.
Data released on Tuesday which showed the Euro Area economy unexpectedly avoiding a recession in the fourth quarter of 2023, whereas the markets were expecting a repeat of the 0.1 percent contraction recorded in the previous period. The euro's gains amidst the GDP data were offset by the decline in inflation readings.
Preliminary estimates released on Thursday showed annual inflation in the Euro Area edging down as expected to 2.8% in January, from 2.9 percent in the previous month.
The EUR/USD pair which had jumped from the week's low of 1.0779 on Thursday to the week's high of 1.0898 on Friday, tumbled to close at 1.0784, a tad above the week's low. The pair had closed at 1.0852 a week earlier.
The GBP/USD pair too whipsawed on Friday, recording the week's high of 1.2774 as well as the week's low of 1.2613. The pair slipped 0.57 percent during the week, closing at 1.2630, versus 1.2702 a week earlier. The pair's moves come amidst the Bank of England maintaining, as expected, its key Bank Rate unchanged at the 16-year high of 5.25 percent. The central bank reiterated its focus on keeping monetary policy restrictive for sufficiently long to return inflation to the 2 percent target sustainably in the medium term. However, it removed the warning that rates could rise again, putting pressure on the sterling.
The AUD/USD pair slipped heavily during the week ended February 2, shedding close to a percent. The pair closed at 0.6512, versus 0.6574 a week earlier, recording a decline of 0.94 percent. The pair ranged between the high of 0.6625 recorded on Tuesday and the low of 0.6502 recorded on Friday, amidst anxiety ahead of the Reserve Bank of Australia's interest rate decision due late on Monday. Markets expect the central bank to keep rates steady amidst the annual inflation falling to 4.1 percent in the fourth quarter, from 5.4 percent in the third quarter and below market expectations of 4.3 percent.
The USD/JPY pair increased 0.14 percent during the week spanning January 26 to February 2 amidst speculations about Bank of Japan's potential pivot from the ultra-dovish monetary policy stance. The pair closed on February 2 at 148.37, versus 148.16 a week earlier. The weekly trading range was between the low of 145.89 recorded on Thursday and the weekly high of 148.60 recorded on Friday.
Fading hopes of an immediate rate cut by the Fed dominates market sentiment and markets are apparently pricing out rate cut expectations. The Dollar Index has increased to 104.20 amidst risks of the robust economic readings from the U.S. jeopardizing the Fed's easing plans. The EUR/USD pair has fallen to 1.0755 whereas the GBP/USD pair has decreased to 1.2602. The AUD/USD pair is at 0.6500 ahead of the RBA decision. The USD/JPY pair has also increased to 148.50.
