Dollar Bounces on NFP but Can You Trust the Rally?

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Dollar Bounces on NFP but Can You Trust the Rally?

Daily FX Market Roundup February 1, 2019

The U.S. dollar rebounded against all of the major currencies on Friday on the back stronger economic data. Nonfarm payrolls rose more than 300K, manufacturing activity accelerated and the University of Michigan Sentiment index was revised slightly higher for the month of January. Stocks extended their rise, pushing USD/JPY back above 109. More than 300k jobs were created last month, which was significantly better than the 165K forecast and matched December’s +300k rise. Not only does this report tell us that the government shutdown had limited impact on the labor market but after revisions, job gains averaged 241K over the past 3 months. However even though the labor market is on fire, wage growth is slowing and there’s a very good chance of downward revisions next month. More importantly the change in the Federal Reserve’s monetary policy statement is significant enough to keep the US dollar under pressure so don’t trust the rally.

A lot of the Fed’s concerns stem from events like Brexit, funding for the US government and US-China trade issues that could be resolved over the next few months.
Despite the latest economic reports, the economy is still slowing but if Congress passes a permanent spending increase, the UK reaches a withdrawal agreement with the EU and the US forgoes further tariffs on China, 2 rate hikes this year could still be justified. With that in mind, any one of these discussions could go south, sending the markets into turmoil. Press conferences after every meeting this year gives the Fed the flexibility to change policy as needed and so far, domestic and global uncertainty justifies the need for patience. There’s not much in the way of US data, so the dollar could resume its slide.

The biggest loser was sterling, which extended its slide on the back of weaker manufacturing activity. The PMI index dropped to 52.8 from 54.2 and there’s been no new Brexit developments – Theresa May refuses to rule out a no deal Brexit and has not requested to extend Article 50. Euro on the other hand remains under pressure as weaker economic data prevents the currency from breaking 1.15. It did so briefly after the FOMC rate decision but inflation is falling according to the latest German CPI report, retail sales in Germany fell by the largest amount in 11 years and confidence is down across the region. ECB President Draghi feels that the risks have moved to the downside and last week ECB member Weidmann said growth in 2019 could be well below 1.5% and inflation could be noticeably lower. He expects bad news from the economy to continue for a while as uncertainty remains high. There are potential downside surprises to all of next week’s economic reports from Eurozone PPI to retail sales and GDP. US dollar weakness is the only reason why EURUSD rallied over the past week and the lack of US data in the week ahead makes 1.15 a difficult resistance level to break.

The recovery in the greenback curtailed the rally in AUD and NZD despite stronger Australian manufacturing PMI. Next week is a big one for Australia with retail sales, trade balance, services PMI and a Reserve Bank of Australia monetary policy announcement on the calendar. The RBA is not expected to change interest rates but they’ve made it clear that the next move in rates will be higher. The New Zealand dollar was pressured by softer consumer confidence. The Canadian dollar on the other hand was one of the few currencies to extend its gains versus the greenback and that is mostly due to the continued recovery in oil prices.

Kathy Lien
Managing Director

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