Here’s a summary of why this morning the US dollar ($ or USD) feels weak. Concerns about unexpected labor market data and potential tightening from the Federal Reserve (Fed) are heightening this fear. The dollar is continuing to hold a soft undertone today after Friday’s weak non-farm payroll (NFP) report. Analysts warn that larger political risks beyond the domestic sphere may be driving the USD. The currency has lost nearly 4% value since Friday’s dismal employment report was released.
On Friday, the USD received a double dose of bad news. This drop came after the report on August jobs, which indicated that the economy added only 22,000 jobs, far fewer than expected. To add insult to injury, even the June NFP data has now been revised down. It now reflects a decline of 13,000 jobs, the first negative print since December 2020. The three-month average job gain now rests at a mere 29,000, pointing to a troubling turn in the labor market.
The combination of these figures has pulled the US dollar index (DXY) to its lowest point since late July. Futures traders are betting on 70 bps of easing by December. This change is indicative of their expectations for more dovish monetary policy from the Fed. Short term resistance for the USD now comes in around 97.75 to 98.00.
The euro (EUR) rose sharply against the USD. It only temporarily pierced through significant consolidation resistance in the low 1.17s. This movement is a testament to a broader change in market dynamics as investors have begun to adjust to a weakening dollar.
There are no big data drops from the US or Canada today. Importantly, we’ll get the next US CPI and PPI data in just a few days. Market-watchers believe these numbers will do little to move the markets.
“While the USD looks soft this morning, markets may maintain a holding pattern ahead of the Fed and political risks elsewhere may be deflecting pressure on the USD to some extent.” – Scotiabank
The Federal Reserve’s next policy meeting on September 17th is already getting a lot of attention from market participants. Most market participants are staring at a 25bps cut as the inevitable outcome of this meeting following the weak employment data. Recent downward revisions coupled with a negative print from June have justifiably raised some red flags. In hindsight, the balance of argument is that the Fed erred by failing to ease soon enough. Speculation is getting hot about the Fed’s next move. Most still expect them to take a bolder step at their next policy meeting later this month.
“The weak August data make a 25bps cut at the September 17th FOMC a lock. But revisions and the negative June print raise legitimate concerns that the Fed erred in not easing earlier and may be inclined to make a bolder move at its upcoming policy decision.” – Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret