Another 25bp Hike by the Feds Looks Likely after Blockbuster Payrolls Data
USD - US Dollar
The January jobs report in the US on Friday smashed expectations, showing a half-million increase in employment and the jobless rate falling to 3.4%. Such a strong print surprisingly – but clearly – signals employers are still willing to hire despite multi-month falls in industrial production, residential construction output and disappointing consumer spending. One silver lining is that the wage growth slowed from a revised 4.8% to 4.4% year-on-year, a signal that firms are able to hire without offering meaningfully higher salaries despite the very tight labour supply.
This is clearly an inflationary jobs market on paper, and another 25bp hike by the Fed looks highly likely. The data calendar is rather quiet in the US this week, which leaves geopolitical themes more space to drive market sentiment. Hopes of an improvement in US-China relations have plummeted after the US shot down a Chinese air balloon which they claim contained spy equipment. China has reiterated it was a civilian aircraft that had strayed off course and reached US airspace, and has threatened retaliation. We expect the USD to consolidate for the week until new first-tier data in the US are released next week which could reignite the re-rating of US growth and Fed rate expectations.
CAD - Canadian Dollar
Canada's Ivey purchasing managers survey data print is unlikely to disrupt the corrective forces that are weighing on the Canadian dollar. The continued sell-off in US equities add to the weak backdrop. The greenback has approached 1.3450 after finishing last week a little below 1.3400. Look for the loonie to take direction from broader external factors rather than any domestic drivers to start the week.
EUR - Euro
This is likely to be a much quieter week in the eurozone. The big rally in EZ bonds after ECB President Christine Lagarde failed in her rate protest last week is another signal that the ECB has lost its grip on the rate market, and this is not great news for the euro. This could mean that another large EUR/USD move may need to wait until the second quarter, when US short-term rates look more likely to drop and markets may gradually align with a “higher-for-longer” narrative by the ECB. Comments by ECB officials are the most interesting risk events to follow in the eurozone this week and we expect the pair to trade in the 1.0700-1.0900 area.
GBP - British Pound
Growth data is the highlight of this week’s UK calendar. Most analysts expect the British economy to have narrowly avoided a technical recession in the fourth quarter. Still, a 1Q23-2Q23 recession is more than possible, although that could be milder than previously expected thanks to lower energy prices. Growth data and BoE speakers will be the two domestic inputs for the pound this week, although global risk sentiment, geopolitical developments and a supported dollar may work against any positive domestic news. GBP/USD may heavily test 1.2000 in the coming days.
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