Financial markets are responding to a series of economic indicators that suggest shifts in monetary policy could be on the horizon. The U.S. dollar continues to fluctuate dramatically against other major currencies, most notably the euro and British pound. Traders are parsing recent labor market data, inflation data, and expected interest rate moves for hints as to how drastic these shifts will be.
For instance, the GBP/USD currency pair just recently surged back to around the 1.3560 level. After that, a U.S. dollar sell-off led to small rallies in this range. Even with all this improvement in GBP/USD, it remains under the key level of 1.3550. This canary in the coal mine is part of a much larger set of worries about the U.S. labor market and its effect on future economic policy.
Additionally, the United States’ unemployment rate surged to 4.3% in August, a new cycle high. Displaced workers unemployment has increased the fastest on record. This lagging trend is in line with a weak three-month moving average of nonfarm payroll growth, which netted just 29,000 jobs. Others point out that the tepid job creation should have the FOMC quickly pondering even more cuts to the federal funds rate. They hope these dismal stats might force the committee’s hand.
“The U.S. labor market is in a precarious position, in our view, and this is the primary driver of our more dovish monetary policy outlook,” stated an economic analyst reflecting on the current conditions.
Further brightening the economic picture, U.S. Producer Prices came in with a bang in August, posting an annualized gain at a much cooler 2.6%. With producer inflation on the fall, upward pressure on prices appears to be easing. This would leave additional space for future cuts if rates are headed higher.
According to current market forecasts, the FOMC will be likely making two more of those cuts, each of 25-basis points. These cuts could happen at their meetings in March and June of next year. As traders wait for these changes to happen, they are keeping a watchful eye on fluctuations in major currency pairs such as EUR/USD and GBP/USD.
Gold prices have experienced continued price stability, with gold trading in the $3,650 per troy ounce range. Therefore, the precious metal is still looking bullish as investors turn to safe havens due to increased volatility in the markets.
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