Strong U.S. Labor Data Boosts Dollar Amidst Fed Rate Cut Expectation Retreat

December 10, 2023
Strong U.S. Labor Data Boosts Dollar Amidst Fed Rate Cut Expectation Retreat December 10, 2023 Lennox Hamilton

The US labor market has once again outperformed expectations, propelling the Dollar to higher levels over the weekend. In response to the news that the U.S. added 199K non-farm jobs in November, surpassing the anticipated 180K, the Pound to Dollar exchange rate experienced a decline of two-thirds of a percent. This robust employment report prompted a noticeable uptick from October’s 150K, contributing to a positive sentiment around the Dollar. The market’s implied expectations for the first U.S. Federal Reserve rate cut of 2024 receded, providing support to bond yields.

Above-Consensus Labor Market Report:

The U.S. labor market has demonstrated strength with the addition of 199K non-farm jobs in November, exceeding the market’s consensus of 180K. This figure marks a significant improvement from October’s 150K, contributing to a positive trajectory for the Dollar. The impact was immediate, with the Pound to Dollar exchange rate experiencing a decline of two-thirds of a percent.

 

Market’s Reaction and Bond Yields:

The Dollar witnessed increased demand as the market’s implied expectations for the first U.S. Federal Reserve rate cut in 2024 diminished. This positive sentiment supported bond yields, reinforcing the belief that interest rates would likely remain stable for a more extended period. The decline in the Pound to Dollar exchange rate was a direct result of the robust U.S. labor market report.

 

Unemployment Rate and Wage Growth:

Contrary to expectations, the unemployment rate dropped to 3.7% from 3.9%, highlighting the resilience of the labor market. This unexpected decline challenges the notion that a loosening in labor market conditions would be necessary for the Fed to consider cutting interest rates in the coming months. Additionally, wage growth exceeded estimates, with average hourly earnings rising by 0.4% month-on-month in November, surpassing the anticipated 0.3% and accelerating from October’s 0.2%.

Fed’s Concerns and Inflation Outlook:

The Federal Reserve is likely to express concerns over the tight labor market, as evidenced by the elevated pay rates and strong wage growth. The fear is that such conditions could keep inflation above the 2.0% target for an extended period. The data reinforces the Fed’s stance that interest rates should remain higher for an extended duration, supporting U.S. yields and the Dollar.

 

Fed’s Response and Market Outlook:

While the labor market data is not sufficient to signal a major shift in the Fed’s stance, it confirms the end of the recent Pound-Dollar uptrend, at least for the time being. The Federal Reserve is expected to maintain a patient approach, considering the persistence of inflation is less challenging. The robust labor market performance will undoubtedly raise eyebrows in the Federal Open Market Committee (FOMC), emphasizing the tightness of the labor market.

 

Conclusion:

The above-consensus U.S. labor market report has bolstered the Dollar’s position, with positive implications for bond yields and the broader market sentiment. The unexpected strength in job additions, coupled with a decline in the unemployment rate and robust wage growth, supports the Federal Reserve’s message of maintaining higher interest rates. The Pound-Dollar uptrend has been halted by this data, highlighting the ongoing impact of labor market dynamics on currency exchange rates.

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