The US dollar surged on Friday, February 3, after the release of US jobs data which showed that employers had added significantly more jobs in January than had been expected. The report, which is closely watched by the Federal Reserve, also revised the previous month’s data higher, providing the central bank with more room to continue raising interest rates.
Job Creation and Earnings
The US Labor Department’s report revealed that nonfarm payrolls surged by 517,000 jobs in January, far above the 185,000 jobs that economists polled by Reuters had predicted. Additionally, December’s job creation figure was revised up to 260,000 jobs, from the previously reported 223,000. Average hourly earnings rose 0.3% in January, after gaining 0.4% in December. This lowered the year-on-year increase in wages to 4.4% from 4.8% in December.
Market Reaction
The US dollar rose 1.12% against a basket of currencies to 102.92, its highest level since January 12. The euro fell 0.98% to $1.08040, while the dollar gained 1.82% against the Japanese yen to 131.20, its highest level since January 18. Sterling fell 1.39% to $1.20550, the lowest level since January 6.
The markets responded to what was described as a “monster number” by Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. The strong payrolls figure reversed the trend from Wednesday, when traders had raised bets that the Federal Reserve would stop raising borrowing costs after a widely expected 25-basis-point increase in March.
Investor Sentiment
Investors are now pricing in the Fed’s policy rate to peak at 5.03% in June, up from 4.88% on Thursday afternoon, as expectations of rate hikes increase. However, fears of a larger economic downturn may also weigh on the markets.
“Whenever we see these big numbers, especially with the headlines, the fear of the Fed comes back with a vengeance because people are probably afraid that the Fed is going to push things even further than what they have, running the risk of not a soft landing, but more of a car crash,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Wisconsin.
The Federal Reserve’s Policy and Future Outlook
On Wednesday, January 31, the US Federal Reserve raised rates by 25 basis points and said that it had turned a key corner in the fight against high inflation, leading investors to price in a more dovish path going forward. However, the strong jobs data could give the central bank more room to continue raising interest rates.
Fed officials had previously stated that they expected to raise the central bank’s benchmark overnight interest rate above 5% and they have stressed that they will need to hold it in restrictive territory for a period of time in order to sustainably bring down inflation.
Traders had previously bet that the rate would peak below 5% and that the Fed would cut rates in the second half of the year as the economy slows. The next major US economic release that may give further clues to Fed policy will be consumer price data for January due on February 14.
Conclusion
The US dollar rose sharply following the release of strong jobs data for January, which far exceeded expectations. This could potentially provide the Federal Reserve with more leeway to continue raising interest rates. The markets responded to the “monster number” with a significant shift in investor sentiment, and while some may fear a larger economic downturn, others remain bullish on the future outlook.
