US Dollar May Not Find Potent Driver in Payrolls Data

Talking Points:

US Dollar May Not Find Potent Driver in November’s Employment Data
Risk Sentiment Trends May Shape Markets’ Response to US Jobs Report
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A relatively uneventful economic calendar in European trading hours is likely to see traders looking ahead to November’s US Employment report. Expectations call for a 200,000 increase in nonfarm payrolls, marking a bit of a slowdown from the 271,000 gain recorded in the prior month. The jobless rate is seen holding unchanged at 5 percent. Average hourly earnings figures will also command attention considering the Fed’s struggle to bring inflation back toward 2 percent. On this front, forecasts for print at 2.3 percent year-on-year, marking a slight slowdown from the 2.5 percent outcome in October.

In practical terms, this round of jobs data may prove to be a less potent driver of the Fed outlook and the US Dollar than previous outings. Traders have become increasingly convinced that Janet Yellen and company will issue a rate hike at this month’s policy meeting. Indeed, Fed Funds futures now put the probability of a 25 basis point increase at 79 percent, a year-to-date high. FOMC officials have paid a great deal of lip service to the likelihood of this outcome, so it would probably take a truly staggering disappointment to alter their calculus and delay “liftoff”.

On the other hand, pricing in a substantially steeper rate-hike cycle before hearing from the FOMC would likely require an especially dramatic upside surprise. On balance, this means the path of least resistance favors the status quo, and thereby limited follow-through on whatever knee-jerk volatility will emerge immediately after the release.

Policy bets aside, the release may have market-moving potential from a sentiment perspective. Looking at the outcome through this prism, a soft result that keeps Fed rate hike bets intact may spur fears that US growth is an insufficient counterweight to weakness in the Eurozone and China, undermining risk appetite. That may punish higher-yielding FX like the Australian and New Zealand Dollars while boosting the safety-linked Japanese Yen. A strong result might establish a narrative of US resilience even as tightening looms ahead, producing the opposite dynamic.

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