The pound is up against most major currencies this morning, while the US dollar rebounded yesterday on the back of comments from various Federal Reserve speakers and ahead of the big US jobs report today.
Among the Fed speakers, Minneapolis Fed chief Neel Kashkari, who used to be a dovish member of the policymaking committee, said that the US central bank was “quite a ways away” from pausing its rate hike cycle, while Chicago president Charles Evans, another reformed dove, said rates would be near 4.5-4.75% by the spring of next year, with the market pricing terminal rates at the lower end of that range at 4.55% as of March.
Topping that, US Treasury Secretary, and ex Fed head, Janet Yellen urged central banks of major economies to keep fighting inflation, though she mentioned the potential “international spillovers” to the global economy.
Deutsche Bank’s Jim Reid said that added to the previous day’s FOMC members who similarly “pushed back on an imminent reversal” of policy, feeding the investor swing again the chances of a Fed pivot next year and so bolstering the greenback.
Fed funds futures for December 2023 made their biggest daily jump since the September FOMC meeting to 4.33%, still beneath the 4.6% that the rates committee had in their dot plot for end-2023 a couple of weeks back, and the 4.50% the market priced in eight days ago.
But, said Reid, “the moves over the last couple of days do suggest they’re having some success in pushing back on the rate cut speculation”.
The dollar index rose from the midweek lows around 110 to above 112 yesterday and up to 112.4 this morning, while EUR/USD fell from above 0.992 to below 0.980 yesterday and dropped to almost a one-week low below 0.977 this morning.
Similarly, the pound lost ground but is attempting to battle back in the London session, having dropped from 1.1350 to around 1.11 yesterday, and again bouncing at that level this morning, before rising 0.4% to 1.12096 lately.
Worrying markets were fresh signs that the recent market turmoil is impacting the mortgage market, along with warnings on the energy front from National Grid (LON:NG).
Markets are going to be obsessing about the US non-farm payrolls today, with US inflation next week.
For today’s jobs print the consensus forecast is for around 250k, which would be the slowest pace of monthly job growth since April last year, though pretty solid versus the long-term average.
It could also push the unemployment rate down to 3.6%.
With the futures market currently predicting a 75 basis points rate hike from the Fed at its next meeting, a strong NFP report today would cement those expectations.
Analyst Craig Erlam at Oanda said: “Even earlier in the week when equity markets were rallying strongly, there was always a sense that the jobs report could spoil the party.
“And not because it could point to cracks appearing in the labour market, quite the opposite in fact. The rally was apparently triggered by weaker US economic data, notably the manufacturing PMI and JOLTS job openings, the latter of which was a particularly large miss.
“The idea being that if the economy is suffering under the weight of rate hikes, the Fed may ease off the brake. If I sound sceptical, it's because I am.”
With the Fed still hoping to engineer a softish landing that does minimal damage to the labour market but willing to sacrifice this aim in its mission to control inflation, he said the most important aspects of today's report are hourly earnings and participation, barring a sudden unexpected spike in unemployment that generates some labour market slack.
“A continued easing of hourly earnings and an increase in participation are more likely that a sudden spike in unemployment. If either happens, investors may board the risk train once more and ride the equity market rally into the weekend. Another hot jobs report though could achieve quite the opposite, suggesting the Fed has a lot more work to do and have investors running for cover.”
Erlam drew attention to the Japanese yen.
“Other countries will also be affected as they battle rapid depreciation against the soaring dollar.
“Japan is right at the top of that list and a hot jobs report today could be the catalyst for another round of FX intervention.”
The decline in Japan’s foreign reserves in September was the largest on record, in part due to the intervention the Bank of Japan made two weeks ago.
The yen is trading at 145 to the dollar, just shy of where it intervened in September and around the level the BoJ conducted a rate check the week prior.
“A hot jobs report could see that spike once more and the Ministry of Finance and BoJ will be ready to act. Whether they'll be willing to or not may well depend on the outcome of the report and whether it breaches a threshold the MoF deems too far. Markets will no doubt be on high alert,” said Erlam.