• Joel

What Next for USD Following Strong US NFP Data?

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USD saw a decent pick up in wake of today’s NFP data, which showed that the US labour market is continuing to recover well following disaster in April (when more than 20mln Americans were thrown into unemployment as a result of Covid-19 lockdowns).  1.371mln jobs were added to the US economy in August, according to the Bureau of Labour Statistics, pretty much bang in-line with expectations for job gains of around 1.4mln. Moreover, the unemployment rate dropped significantly more than forecast to 8.4% from above 10% (exp. 9.8%). This drop in unemployment came despite a rise in the participation rate to 61.7% from 61.4%. Pretty much, more Americans are actively engaged in the workforce (either looking for a job or working) than last month, and more of these Americans have actually been able to clinch a job.  Do note that 238k of the 1.371mln jobs added to the economy in August were temporary hires by the government to conduct a census. But everyone knew this was going to be the case (as in, the expectations reflected this 238k in additional jobs), so the report was a strong one nonetheless. DXY thus picked up significantly in wake of the report and is currently testing the 93.00 level and the north of its recent downwards trends channel.  Will today’s strong data be enough for USd to break significantly above 93.00? Well, no one knows which way the market is going to go. Anything can happen. That is markets.  But when thinking about this question from a fundamental standpoint, there are a few important considerations… 1) Today’s data rounds off what has thus far been a very strong August in terms of US data. Remember, PMIs and survey data in general have been strong, and now strong jobs data (the rest of the hard data will now be expected to back this August strength up). Meanwhile, data in the Eurozone has been very soft.  Remember one of the key ideas driving EURUSD higher in July was expectations for Eurozone economic outperformance vs the US. This has NOT been the case in August.  2) What does this data mean for the Fed and US interest rates? In the short-term very little. With the Fed’s recent shift in policy, which has seen shift to placing higher importance on achieving full-employment and also seeking to average inflation at 2% over-time (meaning they will tolerate an inflation overshoot for some time over the next few years), they will almost certainly not be tempted to change anything about current policy guidance.  This is only likely as unemployment actually starts getting closer to its pre-Covid-19 levels, and after inflation has sustainably hit its target. The US economy is still WELL away from either of those things happening.  Thus, there is no reason to expect that US interest rates will be going up anytime soon, which ought to keep any USD gains capped.  3) What does this mean for the prospect of further US fiscal stimulus? Today’s strong data will take the pressure off of both the Republicans and Democrats to deliver the next round of stimulus. Talks were already dead, with the Democrats seemingly keen to wait it out until after the US election (unless the Republicans make HUGE concessions).  The Fed has been impressing the need for stimulus to be delivered soon, as they fear economic slowdown beyond August awaits. Continued deadlock will not be good for USD. 


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