- The US consolidates losses with upside attempts capped below 148.00
- Higher hopes of Fed cuts, following Friday's NFP report, are weighing on the US Dollar's bulls.
- The Yen is failing to take advantage of the weaker Dollar after the confusing BoJ stance.
The US Dollar is posting moderate gains against the Japanese Yen on Monday, but remains limited below the 148.00 levels, and far below Friday’s highs near 151.00. Higher bets that the Fed will cut rates further in the next months are weighing on the US Dollar’s recovery.
US jobs data released on Friday rattled markets, with an undershoot net increase on employment in July and sharp downward revisions of May and June’s reports, which undermined the theory of a resilient US economy and prompted investors to ramp up bets of Fed cuts.
Hopes of a Dovish turn by the Fed are hurting the USD
Figures by the CME Fed Watch tool show that futures markets are now pricing more than 80% chances of a 25bps cut, from less than 40% before the data release, and an average of 63 bps rate cuts in the second half of the year.
Furthermore, the resignation of Fed Governour Adriana Kugler, a voter and a hawk, paves the path for US President Trump to nominate a candidate closer to his interests. Against this background, the US Dollar is struggling to take a significant distance from Friday’s lows.
In Japan, the BoJ conveyed a mixed message last week, reiterating its commitment to gradual monetary tightening but giving few details about the timing of the next rate hike, and showing comfort with the recent Yen weakness. Investors reacted by selling the JPY after the event.
The calendar is light today, with only the US Factory Orders data on schedule. The market consensus points to a weak reading, which might add to the evidence that tariffs are starting to pinch. Unless there is a positive surprise, this is not expected to be a particularly dollar-supportive release.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
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