US dollar analysis: NFP trounces expectations - Forex Friday

• US dollar analysis: NFP trounces expectations at +353K
• USD/JPY and bond yields jump, gold drops
• Light macro events in week ahead

Welcome to another edition of Forex Friday, a weekly report in which we highlight selected currency themes. In this week's edition, we will discuss the US dollar and following a very strong US jobs report.

All the attention was on the NFP data today, which had the potential to set the tone for next week as well when the macro calendar is a bit lighter. Consensus was for +185K on the headline jobs gains, with investors also keen to find out what type of a revision the December’s numbers would inevitably get. After all, 10 out of the past 12 NFP releases have been revised lower, which is why investors have been eager to expect rate cuts sooner than the Fed has indicated.

Well, this time, December’s numbers were revised higher, for a change, supporting the Fed’s cautious approach. But more to the point, the headline jobs data was also much stronger than expected. Consequently, bond yields shot higher as investors pushed their expectations over rate cuts further out.

Dollar analysis: NFP easily beats expectations, causing US dollar to rally

The headline non-farm payrolls report was much stronger compared to expectations at +353K vs. +185K eyed. The prior month was also revised sharply high to +333K from +216K, suggesting the jobs market is far from cooling. This underscores the Fed’s view that a cautious approach towards rate cuts is warranted. Indeed, wages grew even more robustly than the previous month, coming in at +0.6% on the month, double the expected figure and follows a +0.4% rise in December. This means that the year-over-year rate was pushed up to 4.5% instead of staying at 4.1% as per expectations. Finally, the unemployment rate was unchanged at 3.7%, beating expectations for a small uptick.

Dollar analysis: Were investors wrong to doubt the Fed post FOMC?

It will be interesting to see whether these initial post-NFP moves would last. Fundamentally, there is little reason to fade these moves, but there was an interesting reaction that followed the FOMC meeting in mid-week, when US bond yields fell further even though Chairman Powell downplayed the chances of an early rate cut. In response, US equity markets pushed even higher, supported by robust earnings from Amazon, Meta and a few others. The US dollar also weakened as falling yields helped to underpin foreign currencies, and gold.

But those moves have revered somewhat so far in the immediate post-NFP reaction. Judging by this week’s price action, it looks like the market has got it wrong, as investors once again convinced itself that interest rates are coming lower this year and so yields should be heading lower, over time, anyway. To some degree you can understand why, given we had a few data misses in the last couple of days to support that view. After all, the market is always forward-looking and evidently, investors don’t see the risk of inflation remaining sticky as being high. This is perhaps why the US dollar failed to build on its gains made in January. But in light of today’s data release, are we now going to see a new bullish trend for the dollar and a bearish one for gold? The jobs report is possible bad news for equity markets, but so far, we have only seen a mild reaction in futures.

Dollar analysis: Technical levels to watch on the DXY

Source: TradingView.com

There are also technical reasons why the dollar struggled earlier this week. The Dollar Index found resistance around the 200-day average circa 103.50 area. Despite numerous efforts, it struggled to break through this technical hurdle. But after the strong NFP data, it is now having another crack at it, and should we see a bullish break though then we could well see a run above the December’s high at 104.26 next. Meanwhile, if despite today’s strong data the dollar reverses to go back below the 200-day, then this will represent a massive bearish signal, potentially signalling the resumption of the dollar’s downtrend that started in Q4 of last year. But at the time of writing, it didn’t look that way at all. 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R