The U.S. dollar had its strongest week against major currency pairs in 12 months. Even as the United States is suffering a bout of political uncertainty, the dollar became a safe haven as stocks and bonds saw massive moves this week. The signing of a federal budget by U.S. President Donald Trump boosted the dollar ahead of the release of retail sales and inflation data next week. Central banks are moving away from record low interest rates around the globe.
It has certainly been a chaotic trading week for the global equity markets amid fears of mounting inflationary pressures and higher interest rates. Asian shares suffered heavy losses during early trading on Friday following Wall Street’s steep declines overnight.
The forex markets were relatively calm today. All eyes were on Wall Street as investors tried to gauge the appetite for risk as the indices bounced around key levels after their significant falls the day before.
The U.S. dollar rose against major pairs on Friday. The release of the U.S. nonfarm payrolls (NFP) proved to be the much needed shot in the arm after the greenback was under pressure for most of 2018. The job gains were above expectations but more importantly, the hourly wages came in higher, giving the Fed a potential green light to hike 3 or 4 times in 2018. The market is estimating a 77.5% probability of the first rate lift to come in March.
On the surface of today’s landscape, there truly was not a catalyst the dollar dump. Yesterday, the Fed paved the way for four rate hikes this year. European Central Bank member Coeure implied that a stronger Euro would slow down the ECB’s plan to tighten while encouraging a currency war. U.S weekly Jobless Claims beat expectations.
Friday’s key event risk will be the U.S. jobs report for January, which should offer fresh insight into the health of the U.S. labor market. With the Federal Reserve expressing optimism over inflation rising this year and a brighter outlook for the economy, today’s NFP report will be in sharp focus. Markets expect the U.S. economy to have gained 180k jobs in January, with average earnings up by 0.3%, while the unemployment rate is expected to remain unchanged at 4.1%.
In the event the data beats expectations then it makes sense to look for signs of dollar strength against currencies which have underperformed, such as the yen. While the likes of the EUR/USD, Swiss franc/dollar (CHF/USD) and the British pound/dollar (GBP/USD) have rallied above their highs last year, the JPY/USD has yet to do the same.