What the US Federal Reserve does with interest rates is still very relevant to FX markets. The dollar rallied around 1% yesterday on the strong December ADP jobs report. Signs of strength in the US labour market are understandably being read as prolonging both the Fed’s concern with tight labor markets and its preoccupation with inflation. Consensus for today’s NFP is +225K for the December jobs report. This outcome will probably see the dollar hold onto this week’s gains. The uncertainty around next Thursday’s US December CPI release may limit the dollar downside should today’s US data disappoint.
Canada also reports its November employment data. Full-time employment growth has averaged almost 59k a month in the three months through November. The Bank of Canada meets on January 25. The market has gradually increased the odds of 25 bp rate hike. Shortly after the December 7 Bank of Canada meeting, the market had about a 1-in-3 chance of a quarter-point hike discounted and it is now about seen as about a 70% chance. The US dollar tested support in the 1.3480-1.3500 area yesterday and it largely held. In yesterday's recovery, the greenback approached 1.3600 and is past 1.3630 in the European morning. The upper end of the range is around 1.3685-1.3700. Look for significant volatility this morning based on Jobs data.Observe the USD/CAD trends.
Today’s release of December eurozone inflation is expected to see the headline rate dropping to 9.5% year-on-year from 10.1% in November. A fall in the headline rate should be well telegraphed given the big decline in energy prices, but the core rate is expected to nudge up to 5.1%. Core inflation will increasingly be the focus as 2023 progresses. That concern over core inflation is one of the factors keeping the pricing for the European Central Bank cycle quite sticky at close to another 150bp of tightening this year – taking the ECB deposit rate to 3.50%. A strong US nonfarm payrolls figure today could see EUR/USD losses extend to the 1.0450 area.
GBP/USD fell on a stronger dollar yesterday to dip back under 1.19. We highlighted the Bank of England’s Decision Maker Panel (DMP) survey yesterday and any insights it could provide on inflation expectations and wage growth. In the end, the survey hardly showed much improvement in inflation expectations and wage growth actually firmed up a little. BoE tightening expectations remain firmly priced in for 100-125bp of hikes and we may need clear signs of inflation decelerating before these start to ease. We expect sterling to remain soft and any stronger US jobs data could be worth a move to 1.1780/1800
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