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The Dollar Express steams ahead following the release of above-consensus U.S. job numbers that eradicate the odds of a Federal Reserve interest rate cut in the first half of 2025.
The Pound to Dollar exchange rate slid to a low of 1.2188 after it was reported the U.S. created 256K jobs in December, up from 212K in November and breezing past an estimate for 160K.
"The market moves have been remarkable – the euro has touched a two-year low and taken one step closer to parity, sterling is at a fresh 14-month low, the Australian dollar is at its weakest since 2020, and yields are surging globally," says Kyle Chapman, FX Markets Analyst at Ballinger Group.
In addition to the strong headline figure, the unemployment rate unexpectedly retreated to 4.1% from 4.2%, confirming the economy was in robust shape heading into the new year.
Average hourly earnings were a healthy 0.3% higher month-on-month, and the participation rate remained at 62.5%.
"This is a report that is obviously a lot stronger than the markets were expecting, and they were already expecting a strong number," says Chapman.
Markets entered the release anticipating less than a 50% chance of the next Fed rate cut happening by July.
This is now priced out, leaving just one cut priced for the entirety of 2025.
"One less cut and rates are holding steady for the entirety of 2025, and then we would need a real reacceleration for the Fed to start putting hikes back on the table," says Chapman.
Reduced rate cut expectations in the U.S. are pushing U.S. bond yields higher, which has the effect of raising bond yields globally.
This will be unwelcome to the UK's Chancellor Rachel Reeves, who has had a torrid week amidst an unruly jump in UK bond yields, which have shredded any fiscal headroom she had left over following last year's budget.
"What has been clear in recent months is that what happens in the Treasury market quickly spills over to other markets, and I suspect that UK Chancellor Reeves is looking on in horror as US economic strength drags gilt yields higher. Fewer than 50bps are now priced in for the Bank of England this year," says Chapman.
The outlook for Pound-Dollar remains firmly fixed to the downside.
Counterpoint...
While it's full steam ahead for the Dollar, there is an interesting response from the renowned Peter Schiff, Chief Economist & Global Strategist at Euro Pacific, to these data:
"The dollar should not be higher on today's "strong" jobs report or rising nominal bond yields. Instead, traders should focus on the imminent collapse of real interest rates, as the Fed fails to sufficiently raise interest rates or step up QT to fight a rekindled inflation fire."
Food for thought.