Dollar rallies hard as US job reports undermines case for Federal Reserve cuts

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8 July 2019


We’ve been harping for a while that interest rate markets were getting ahead of themselves, pricing in almost four full cuts from the Federal Reserve over the next few quarters.

ast week’s strong US jobs report provided support for our view, making it clear that no meaningful slowdown is apparent in the pace of US job creation. The news sent ten-year Treasury yields back across the psychological 2.00% level and ignited a strong countertrend rally in the US Dollar, which finished the week up sharply against every G10 currency save the Canadian Dollar, itself buoyed by a strong domestic jobs report.

It is notable that the Dollar’s performance was much more mixed against major emerging market currencies, many of which managed to put in yet another strong performance instead of higher US yields, as fears over the world economy recede.

The focus for this week remains entirely on the US. Federal Reserve Chair Powell will testify in front of Congress. It will be interesting to see the extent to which recent strong economic numbers dampen his enthusiasm for looser policy.


There are increasing signs that the uncertainty over the Brexit standoff is starting to impact UK business confidence. The PMI indicators of business activity dropped below the key 50 level that indicates contraction.

This week we will see whether this loss of confidence is reflected in actual economic data when GDP growth for the three months to May is released on Wednesday.


The announcement that Christine Lagarde would be the next ECB President sends a message of continuity and, perhaps, dovishness at the margin. Markets certainly saw it this way, as Italian bonds rallied strongly and the Euro started losing altitude even before the US payroll report on Friday.

Also, the EU decision not to pursue penalties against Italy over its budget deficit signals a more tolerant view of additional fiscal stimulus. This means that, in our view, additional monetary easing may be less necessary, which should be positive for the Euro over the medium term.


Last week’s positive noises in the trade front were capped on Friday by a very strong payrolls report out of the US. Job creation rebounded strongly in June from its May dip, real wages continue to grow modestly but steadily. There is no sign that a recession or even a significant slowdown is on the cards in the US.

After the report, markets seemed to rule out any chance of a 50 bp cut in the Federal Reserve July meeting. While we think that one cut is politically inevitable, we do not see the conditions in place for a sustained easing cycle.