Monday, July 8, 2019

The Dollar rallies as the NFPs surprised higher but its outlook still hinges on the Fed

  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil


The Dollar kicks off the new week on positive footing on the back of the Non-Farm Payrolls report released last Friday. The labor market figures surprised to the upside with investors now doubting whether the Fed will go ahead and cut rates as previously expected. With plenty of opportunities to hear from the US central bank this week, the odds of easier policy ahead will dictate how the greenback trades going forward. Higher beta currencies are coming under pressure and Gold dropped below $1,400 once again while equities are in the red.

On Friday, we explained how a mere confirmation of economists’ expectations for a 160k printing would have been received as a bullish signal that would reinvigorate the Dollar. Albeit, the actual numbers were far more exciting than what the market was expecting. A total of 224k jobs were added to the US economy and despite the slight miss in wage growth, the labor market report was received as a clearly bullish reading. The Dollar rallied across the board and 10-year yields exploded above 2% as investors were reducing their bets in favor of the Fed aggressively easing policy this month.

Looking ahead, the Dollar should trade higher at the start of the week but the way forward will be dictated by fresh hints from the Fed on whether they feel the situation has improved in recent weeks. Fed Chairman Powell will be testifying in Congress on Wednesday and Thursday while the minutes from the previous FOMC meeting will also be released mid-week. Although the account of what was discussed during the last monetary policy meeting will help explain the rationale behind the Fed’s decision to open the door for a rate cut, Powell’s remarks may prove to be more timely - and effectual.

We know that the US central bank was worried about the lack of progress in the US-China trade talks and the possibility of additional tariffs, a scenario that has been avoided for now. At the same time, the slowdown of the economy was another reason for concern so, given the surprisingly strong NFP report and the positive trend in job growth in place, it will be key to see whether Powell assumes a more sanguine stance when talking to the House and the Senate. If he does so, then the Dollar will extend its gains as market participants will assume that a potential rate cut in July - if any - will be a “one and done” approach.

Meanwhile, Gold pushed lower on Friday after the NFPs beat expectations and prices dropped below the $1,400 mark. Since Asia opened, the yellow metal is attempting a slight recovery moving back above this key psychological level but with the odds for an aggressive rate cut this month diminishing, the base scenario calls for some consolidation around this area until we hear from Powell.

Equities closed in the red on Friday as the surprisingly robust NPF report casted doubts on whether the Fed will proceed with a number of rate cuts soon. We have mentioned in several occasions that the bullish bias supporting equities’ recent gains was based on the likelihood of a significantly easier monetary policy ahead. Now that these odds are being adjusted lower equities may struggle to continue climbing. Futures on either side of the pond are pointing lower this morning and a “wait and see” stance is likely until investors get the chance to hear what Powell has to say mid-week.


  • Eurozone Sentix Investor Confidence - 12.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research