Blockbuster Jobs Report Reverses The U.S. Dollar's Slide

currency janu25 06feb23 lt

Currency exchange rates whipsawed in the week of January 30 - February 3 amidst the Fed's monetary policy pronouncements on Wednesday acknowledging the abatement in inflation, and the stunning jobs report on Friday reiterating the strength of the labor market.

The week started off on strong expectations that the Fed would ease its monetary policy, triggering the Dollar's weakness. The Dollar Index (DXY) which measures the Dollar's strength against a basket of 6 currencies opened the week at 101.92 and touched a low of 101.04 by Wednesday. The Federal Reserve's as-expected 25-basis points rate hike, a dovish commentary and the Fed Chair's acknowledgement that a disinflationary process had started in the economy exacerbated the Dollar's slide, causing the DXY to fall further to a weekly low of 100.82 by Thursday.

But the strength of the jobs market was beyond what markets had expected. The non-farm payrolls addition in January that markets expected to be 185 thousand, versus 260 thousand in the previous month came in at 517 thousand, potentially throwing a spanner into the Fed's easing plans. The unemployment rate fell to 3.4 percent from 3.6 percent earlier. The ISM Non-manufacturing PMI surging beyond expectations to 55.2, denoting expansion, implied a robust services sector.

The fear that the strength of the U.S. economy could cause interest rates to continue to remain high for a longer period lifted the Dollar, and the Dollar Index surged to a weekly high of 103.01 on Friday, before finally ending the week a tad lower at 102.92. The DXY gained 0.97 percent in a span of 7 days.

The European Central Bank's as-expected 50-basis-points rate hike and hints of a similar dose in the next review helped the Euro stay strong. The EUR/USD pair which had closed on January 27 at 1.0867, strengthened to a high of 1.1034 by Thursday, aided by the ECB's stated commitment to continue the inflation combat by keeping interest rates sufficiently restrictive. But the vastly higher jobs data from the U.S. bolstered sentiment in favor of the U.S. Dollar causing the pair to drop to the week's low of 1.0791 on Friday, before ending the week at 1.0793. The pair shed 0.68 percent during the week.

The British pound depreciated close to 3 percent to the U.S. Dollar amidst the Bank of England's unexpected hints of a policy pivot. Alongside the expected rate hike of 50 basis, the Bank of England's omission of the word "forcefully' from its forward guidance triggered bets that the BoE was near the end of its hiking cycle. This caused the sterling to weaken in the currency market. The GBP/USD pair which had closed on January 27 at 1.2397, finished trading on Friday, February 3 at 1.2051 after touching an intra-week high of 1.2419 and an intra-week low of 1.2047.

The yen which maintained a rising trend against the Dollar during the course of the week, weakened on Friday, overwhelmed by the rebound in the Dollar post the higher-than-expected jobs data. The USD/JPY pair which had opened on January 30 at 129.71 dropped to as low as 128.08 on Thursday before the jobs data surprise lifted the Dollar, causing the pair to rise to 131.24. Between January 27's closing level of 129.85 and the closing level of 131.17 on February 3, the pair increased more than 1 percent.

The AUD/USD pair too mirrored the payroll tumble in other major currencies, strengthening to the highest level of 0.7158 by Thursday before dropping to the weekly low of 0.6919 on Friday after the jobs data. The pair moved from 0.7103 to 0.6919 between January 27 and February 3, decreasing more than 2.5 percent during the week.

The Dollar's strength after the jobs data and PMI readings on Friday has been further reinforced with the escalation in tensions between China and the U.S. The Dollar Index has since strengthened to 103.38. The Euro depreciated to $1.0760, while the pound is currently at $1.2046. The Australian Dollar is currently trading at $0.6886 ahead of the Reserve Bank of Australia's interest rate review on Tuesday. The USD/JPY pair has increased to 132.52 amidst reports that a dovish candidate is being proposed as the successor to the Bank of Japan's top role.

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