Total U.S. nonfarm payrolls (NFP) employment rose by 257,000 in January, beating expectations of a 228,000 rise. The focus for market participants was on the hourly wages component that decreased in December, and was expected to be higher in this report. The average hourly gains also beat expectations at 0.5%.
The USD is gaining across the board, boosted by the sentiment that the Federal Reserve will hike rates sooner rather than later. Softer data in the past month starting with the -0.3% average hourly number was followed up by weak gross domestic product, retail sales, and trade balance figures. Collectively it started to weigh on the USD and pushed back the expected date for an interest rate hike in the U.S.
Forex Rate Graph Total U.S. nonfarm payroll employment rose by 257,000 in January, 2015
Comments from the Federal Reserve Bank of Philadelphia President Charles Plosser about monetary policy being data dependent and that he'd push for raising interest rates will resonate. Though he's not a voting member of the Federal Open Market Committee, Plosser's remarks in light of NFP data that was positive in all components could prompt the hawks to circle. Moreover, the NFP data hinted at higher inflation which continues to be a question mark concerning the start of a tightening cycle.
Interest rate divergence makes the U.S. dollar more attractive as other major central banks are pushing easing policies intended to boost growth in the struggling economies of Europe, China, and Japan to name the biggest ones. A rate hike by the Fed will boost the U.S. dollar could cause a slowdown as imports rise and exports decrease as seen in the latest trade balance figures which showed a larger deficit that will grow.
The EUR/USD moved 100 pips in the aftermath of the NFP report release. Fundamental factors drove the direction of the move as the EUR depreciated, but the size of the move was pared back as Swiss National Bank intervention and the Greek debt negotiations loom over the price of the single currency.
On Tap for Next Week
The U.S. employment report closed out an eventful week in the forex market. Most of the events were not scheduled and came as a direct result from the Greek elections results and now their intent on renegotiating the terms of their bailout. The clash between the newly appointed Greek finance Minister Yanis Varoufakis and his German counterpart Wolfgang Schauble summarized both of their countries position on debt renegotiation.
The European Central Bank (ECB) [revoked the use of Greek sovereign debt as collateral] as it is not of investment grade. The announcement sent Greek stocks tumbling and Varoufakis accused the central bank of blackmail. The ECB justified its actions with the fact that allowing debt rated as junk was done in the past with the assumption that bailout negotiation terms would be honored, that does not seem to be the case. The Greek financial system will have to depend on a higher interest rate mechanism to keep afloat.
The conversations between Greece and the European Union will keep political uncertainty running high next week. The Bank of England and the Reserve Bank of Australia are the two major central banks who will be active during the course of the week. Gross domestic product data will be published in Europe with most of the attention focused on Germany. The European Commission (EC) recently upgraded the growth forecast of the euro zone and this will be the first release to compare it to. Going forward the forecast will be less helpful as it was made with the cutoff date of January 23. Meaning it was done before the Greek elections which has the potential to impact future European growth. In the EC forecasts Greece to expand at a lower rate than previously estimated.
