Dollar in Need of Strong Jobs Report to Recover

Trump anxiety and Fed patience have dollar lower against majors

After raising interests for only the second time in a decade in December, the Federal Reserve firmly signalled its intention to increase the pace of rate hikes in the coming years, indicating that three more could follow this year alone.

The Fed on Wednesday passed on the opportunity to implement the first of these three rate hikes but did stress that measures of consumer and business sentiment have improved, perhaps deciding it prudent to gather insight on Donald Trump’s early days in office before acting again.



The result of this is that markets have priced in only a 37% chance of a rate hike prior to the June meeting and only two rate hikes this year, and even this will depend on the economy performing in line with expectations. With Trump’s policies giving reason for optimism as well as concern, the economic data – in particular the jobs report – could provide the best insight into whether the Fed will be able to follow through on its intentions, having failed to do so in 2016.

The benefit of the US jobs report is that it not only offers in-depth insight into the strength of the labour market, it also provides a look into whether sustainable inflationary pressures could be building.

With the Fed being of the belief that it is very close to achieving its target on employment, the inflation side of its dual mandate becomes increasingly important which is what makes the earnings component of the jobs report even more intriguing.

Having struggled to make much progress prior to 2015, average annual earnings growth has continued to improve over the last couple of years and currently stands at around 2.9%. While this still leaves plenty of room for improvement if it’s going to return close to pre-financial crisis levels, the line is headed in the right direction and we’re seeing no signs of wage growth slowing.

Should the trend of wage growth continue, it will give the Fed confidence that not only is the labour market tightening but interest rate hikes are necessary in order to avoid it falling behind the curve, a concern policy makers have repeatedly warned against.

Of course, as is always the case, other components of the jobs report are likely to steal the headlines, despite arguably being of lesser importance at the moment. Unemployment is expected to remain very low at 4.7% aided by a frustratingly low participation rate of 62.7%, the latter of which continues to baffle policy makers expecting an improvement as seen with the rest of the data.

Non-farm payrolls – the number of jobs created in the previous month – are expected to have risen by 175,000, although if Wednesday’s ADP figure is to be believed, we could be in for a very positive surprise.

ADP – which releases what is meant to be an estimate of the NFP number two days prior to the release – reported that 246,000 jobs were created in January which is much higher than expectations. If the NFP release confirms this, it will be interesting to see whether the dollar rebounds higher having come under some pressure since coming off its highs at the start of the year.

For more charting insight ahead of the jobs report, check out our preview video below.

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.