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US employment numbers sends USD higher, market still prices in more rate cuts than Fed expects

Good morning


The US dollar was near its lows as we approached the US nonfarms payrolls on Friday, GBPUSD was up in the 1.2770 region while EURUSD was just short of 1.0900.  We’d been expecting a headline number around +185k, the risks did seem to be on the upside but no one was expecting a number anywhere near as strong as the headline +353k, not the upward revision to the previous release which took that from +216k to +333k.  Average hourly earnings also surprised with a move higher, while the unemployment rate held at 3.7%.


The effect on the US dollar was immediate.  With the data suggesting rate cuts would indeed be further away than some had been hoping, GBPUSD dropped to the low 1.26’s, EURUSD to 1.0780.  Overnight both pairs tested even lower, helped by an interview with Feds Powell where he reiterated the point that Fed wants to wait to be sure that inflation really is heading back to target before making any rate cuts.   Powell says Fed expects three rate cuts this year, starting around mid-year.  The next ‘dot plot’ is not out until March, so data between now and then will be crucial.  The market continues to price in more rate cuts than the 75bps the Fed are expecting.


EURUSD pushed down to 1.0765 and GBPUSD did very briefly slip below 1.2600 but both are off those lows as I type at 1.0780 and 1.2620 respectively.  GBPEUR dipped below 1.1700 overnight, currently back up at 1.1705.  We hear from BoEs Dinghra this afternoon, she was the only member who voted for a rate cut last week so we will not be at all surprised to hear dovish noises from her.


The USD was higher against other currencies as well of course.  USDJPY traded up from mid-146’s to mid-1.48’s, USDCAD pushed from 1.3370 to 1.3475, while AUDUSD dropped to its lows since Nov 2023, trading for a while below 0.6500, now 0.6510.


We do have the RBA rate announcement due tonight.  AUD has been showing signs of weakness before the nonfarms, trading from a high in December around 0.6870 to those 0.6500 lows, the weaker than expected Aussie inflation numbers last week seem to have encouraged those who are looking for RBA to turn slightly more dovish as other central banks have started to do.  GBPAUD hit its highest levels since Sept 2023 last week, reaching a heady 1.9455 although it had slipped back to 1.9305 just before the nonfarms.  Now 1.9390, there is certainly room a bit of volatility here depending on the tone taken by RBA.


Elsewhere, US have continued their attacks on Houthi rebels over the weekend although unsurprisingly the Houthis have vowed to step up their own attacks.  The days of US firepower forcing others to come into line seem to be over.  We wait for Hamas to decide if they will accept a proposed ceasefire, it had looked as though they had rejected it but a Hamas spokesman later denied this.


It was an entertaining weekend in terms of sport.  As I type, England have lose the second test match against India.  It had looked as though England may have a chance after bowling India out for 255 in their second innings, but it was not to be.  Italy nearly pulled off a famous victory over England in the rugby.  England managed a narrow three point win in the end but their defence will need to step up a few notches when they face tougher opponents.  Ireland remains favourites again after their demolition of France.


The Premier League has been pushed wide open after Arsenal beat Liverpool yesterday.  Spurs meanwhile failed to beat Everton, managing just a draw which dented their chances of getting back into the top four.  Its going to be an exciting end to the season.


Finally, we all know about the large haldron collider that sits 80 metres or so below the surface of Switzerland.  It certainly is large, with a circumference of almost 17 miles.  Now there are plans afoot for a replacement which will dwarf the existing collider, with a circumference approaching 60 miles.  It will be deeper at around 200 meters and the hope is that the new machine will help scientist discover dark matter and dark energy. 


Mind you, with costs likely to be approaching £20bn it is not yet clear whether such a machine will be built.  For it to work properly it wold rely on extremely powerful magnets that have not even been invented yet.  That’s a bold move, building something in the hope it will work one day.


Have a great day.  PMI’s from EU and US will be the main focus, it will take a really strong reading from the US to really push GBPUSD out of this 1.26-1.28 range that we have been in since mid-December.


-  09.00 EU composite PMI

-  10.00 EU PPI

-  14.45 US S&P composite PMI

-  15.00 US services ISM

-  15.00 BoEs Dinghra speaks

-  19.00 Feds Bostic speaks

-  00.01 UK BRC sales

-  00.30 RBA rate announcement

-  00.30 AUS retail sales

-  04.30 RBA press conference


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