- Traders are pricing a 66% chance of a December Fed rate cut.
- The US economy likely added 195,000 jobs in November.
- Tokyo inflation figures raised the likelihood of a Bank of Japan rate hike in December.
Currency futures extended Friday’s move when the dollar ended the week down amid the US Thanksgiving holiday. At the same time, the greenback was weak as market participants geared up for key US economic reports.
The dollar had a bearish week as market focus shifted from Trump’s win to the looming Fed policy meeting. However, it ended November up after Trump’s win brightened the outlook for the US economy and increased bets on a gradual Fed rate-cutting cycle.
Last week, market focus zoomed in on US inflation and monetary policy. Inflation figures revealed that price pressures were behaving exactly as expected. Therefore, no surprise meant that the Fed would likely go ahead with a rate cut in December. Consequently, traders were pricing a 66% chance of such an outcome, putting downward pressure on the dollar.
However, the outlook for the December meeting will keep changing with incoming data. This week, the US will release the all-important nonfarm payrolls report. According to forecasts, the economy likely added 195,000 jobs in November. Meanwhile, the unemployment rate might rise from 4.1% to 4.2%. This outcome would convince policymakers to lower borrowing costs by 25-bps at the next meeting.
In October, the economy added only 12,000 jobs, raising fears of a deterioration. However, experts believed the decline came due to hurricane disruption. However, if job growth is slow again in November, Fed rate cut expectations will jump as it would signal a rapid slowdown in the labor sector.
Yen (Source: Bloomberg)
Meanwhile, the yen had a bullish run on Friday after Tokyo inflation figures raised the likelihood of a Bank of Japan rate hike in December. Notably, core inflation in Tokyo increased by 2.2%, compared to estimates of a 2.1% increase. Moreover, it was a sizable increase from the previous reading of 1.8%. BoJ governor Kazuo Ueda noted that rate hikes were nearing, given the upbeat economic figures.
On the other hand, the Canadian dollar was fragile on Monday after rising in the previous session despite downbeat data. Canada’s economy expanded by 1% in the third quarter, missing forecasts for a 1.5% growth. The slower economic growth raised the likelihood of a massive BoC rate cut in December from 31% to 50%.
