Strong Employment Data Fuels Dollar Rally
What’s been happening?
Pound Sterling – UK Markets
The British pound dropped to its lowest level since early January vs the dollar on Friday as the lack of significant macroeconomic data releases and political headlines from the UK left the currency at the mercy of the performance of its major rivals. Against the euro, the British pound was able to post small daily gains. The only data from the UK on Friday showed Halifax House Price Index declined 0.3% on a monthly basis in June but had little to no impact on the currency’s market valuation.
Meanwhile, Prime Minister candidate Boris Johnson told Reuters that the wanted to get a better Brexit deal and reiterated that he will be “totally ready” for a no deal Brexit on October 31 if they were to failf to get a better deal.
US Dollar – US Markets
After moving sideways for the majority of the week, the US Dollar Index, which tracks the greenback’s value against a basket of six major currencies, gained traction and posted decisive gains as the upbeat employment data from the U.S. further weighed on the probability of more than one Fed rate cut in the remainder of the year.
The U.S. Bureau of Labor Statistics on Friday announced that nonfarm payroll employment in June increased by 224,000 following May’s disappointing 72,000 (revised from 75,000) reading and surpassed the market expectation of 160,000 by a wide margin. Further details of the report revealed that the annual wage inflation, as measure by the average hourly earnings, remained unchanged at 3.1% and the participation rate ticked up to 62.9%, lifting the unemployment rate to 3.7% from 3.6%. Boosted by the data, the 10-year Treasury bond yield rose more than 4% to proviade an additional boost to the buck. According to the CME Group’s FedWatch Tool, the probability of the Fed keeping the policy rate unchanged in September following a 25 basis points cut in July is around 33% compared to 24% a week ago.
Later in the day, in its semi-annual report to Congress, the Federal Reserve said the recent "soft readings" on inflation were reflecting transitory influences. "U.S. economic activity continued at "solid pace" in early 2019, repeats will act as appropriate to sustain expansion -semi-annual monetary policy report," the Fed explained.
Meanwhile, President Trump, once again, criticised the Fed’s monetary policy in a Twitter thread on Saturday. "As well as we are doing from the day after the great Election, when the market shot right up, it could have been even better - massive additional wealth would have been created, & used very well," Trump argued. "Our most difficult problem is not our competitors, it is the Federal Reserve!"
Euro – European Markets
Falling Germany Treasury Bond yields continued to weigh on the shared currency and forced it to weaken against both the dollar and the pound sterling on Friday. In the absence of macroeconomic data releases from the euro area, investors continued to price a dovish shift in the ECB’s policy outlook or forward guidance.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Monday.
US: The Fed will publish the consumer credit report.
EU: Germany’s Destatis will release the industrial production, current account and trade balance data. Additionally, Eurozone Sentix Investor Confidence will be published on Monday.