Dollar Jumps On Strong Jobs Data, Altering Rate Cut Expectations

The US dollar index surged to a seven-week high after data revealed unexpected job growth in January, reducing the likelihood of imminent interest rate cuts by the Federal Reserve.

Nonfarm payrolls increased by 353,000 last month, beating economists’ expectations for a gain of 180,000. Average hourly earnings increased 0.6% after rising 0.4% in December.

It “blew away expectations,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. The market has further reduced the chances of a March cut and reduced the number of cuts (it expects) the Fed will deliver this year.

The dollar had recently weakened in line with falling Treasury yields, even after Fed Chair Jerome Powell said on Wednesday that a March rate cut was unlikely.

Treasuries benefited from safe-haven demand due to renewed concerns about the financial health of US regional banks. However, these concerns eased on Friday as US regional bank stocks recovered slightly from a brutal two-day sell-off, helping send yields higher.

Recent moves in the dollar and Treasury yields, in large part, also reflect repositioning, following a strong January for the greenback and higher Treasury yields during the month.

“After a big move in most of January, I would say there was some position adjusting,” said Chandler. After Friday’s data, however, “I’m looking for a firmer dollar tone,” he added.

USX 4-Hourly Chart

USX 4-Hourly Chart

The dollar index hit 104.04, its highest level since December 12th. The euro dropped to $1.07810, just above its weakest level since December 13th. The greenback climbed to 148.58 yen, near its highest level since November 28th.

According to the CME Group’s FedWatch Tool, traders are now pricing in a 21% chance of a rate cut in March, down from 38% on Thursday, and a 75% probability for May, down from 94%.

Sterling fell to $1.2614, the lowest since Jan. 17. The British currency gained on Thursday after the Bank of England kept interest rates at a nearly 16-year high and resisted the likelihood of near-term rate cuts.

The Australian dollar fell to a 10-week low of $0.65035.

On Friday, JPMorgan analysts Jason Hunter and Marko Kolanovic reported that the Aussie has been trying to stage a short-term bullish reversal at “critical support” near $0.65. They said that if it fails to break above resistance at $0.664 to $0.6657 and sees further weakness, it may next test support at the $0.617 to $0.6296 area.

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