US Dollar: Strong payrolls fail to sustain Dollar gains – MUFG

MUFG’s Lloyd Chan notes the Dollar strengthened after a stronger-than-expected August US jobs report, with Nonfarm Payrolls and labour participation surprising to the upside while wage growth eased. Markets now price a significant chance of further Federal Reserve tightening by December, but DXY remains little changed since Fed Chair Warsh’s Jackson Hole speech, suggesting investors are not yet convinced of a sustained Dollar rally.

Jobs data bolster Fed tightening risks

"The US dollar ended last week on a firmer footing after a much stronger-than-expected August nonfarm payrolls report. Nonfarm payrolls rose by 162k in August, well above consensus expectations of 55k, while July employment was revised higher to a gain of 21k from an initially reported decline. The unemployment rate held steady at 4.1% and labour force participation improved to 61.6%, pointing to a labour market that remains resilient."

"Meanwhile, average hourly earnings slowed slightly to 3.1%yoy from 3.2%yoy, suggesting wage pressures continue to ease gradually."

"Importantly, markets continue to price more than 60% probability of a 25bps Fed hike at the September FOMC meeting and approximately 35bps of cumulative tightening by December, equivalent to around 1.4 hikes by year-end."

"DXY gained 0.3% on Friday, though essentially unchanged since Fed Chair Warsh's Jackson Hole speech. This divergence suggests dollar bulls may not be convinced yet that higher yields can generate a sustained dollar rally."

"Renewed calls by President Trump for lower interest rates, together with his threat to stop trading with countries that the US has a trade deficit with, may also contribute to some negative policy premium on the dollar."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)