- The dollar has lost its edge when it comes to monetary policy.
- The US economy added 162,000 new jobs in August.
- Traders are pricing a 75% chance of an ECB hike in September.
Currency futures edged higher on Monday as the dollar struggled to hold Friday’s gains, as the US marked Labor Day. The non-farm payrolls report out last week revealed robust job growth, beating forecasts and increasing expectations for a Fed rate hike. At the same time, inflation worries intensified as Middle East tensions worsened last week. Still, the dollar ended the week down.
The greenback had a bearish week despite Middle East tensions and an upbeat employment report. Ideally, the rising oil prices and subsequent inflation worries should have boosted the currency. However, it has lost its edge when it comes to monetary policy.
The rising oil prices have made most major central banks more cautious. As a result, policy divergence between the US and major economies like the Eurozone and Japan has narrowed significantly. In fact, current bets show a higher likelihood for an ECB and BoJ hike in September than a Fed hike.
US employment (Source: BLS)
Data on Friday revealed that the US economy added 162,000 new jobs in August, well above the forecast of 55,000. A solid labor sector gives the Fed enough room to hike interest rates and tame inflation. After the report, traders were pricing a 57% chance of a hike in September.
Meanwhile, the likelihood of a similar move by the ECB in September stands at 75%. In a similar vein, the BoJ is also expected to raise borrowing costs this month, with a 75% chance of such a move.
Furthermore, comments from Fed officials last week indicated that some policymakers were comfortable with keeping interest rates on hold this month. Notably, Christopher Waller said he was confident with current inflation trends. As a result, he believes the central bank does not need to raise rates. His remarks put downward pressure on the dollar.
Market participants are now looking forward to the US inflation report. A downbeat report would send the dollar lower against its peers, especially the euro and the yen.
“A hot CPI print would all but seal a September hike and underpin a firmer US dollar. A cooler reading would strengthen the case for a hold and leave the US dollar vulnerable to a dovish Fed repricing,” said Elias Haddad, global head of markets strategy at BBH.
