- The US economy added 256,000 jobs in December, well above the forecast of 164,000.
- Market participants expect the Fed to pause in January.
- US consumers raised their one-year inflation expectations from 2.8% to 3.3%.
Most currency futures collapsed on Friday and extended the move on Monday after upbeat US jobs data. Market participants slashed bets for Fed rate cuts in 2025, leading to a rally in the dollar. At the same time, US inflation expectations for the next year soared.
The US released its nonfarm payrolls report on Friday. The economy added 256,000 jobs in December, well above the forecast of 164,000. Meanwhile, the unemployment rate eased from 4.2% to 4.1%, indicating increased demand for labor.
Resilience in the US labor market means the economy is on solid ground, and demand is high. Therefore, inflation might remain at current levels. Consequently, market participants expect the Fed to pause in January. Moreover, they expect only 27-bps of cuts in 2025. As a result, the dollar rallied against its peers.
Furthermore, analysts believe Trump’s administration will increase local demand and lead to a pike in inflation. If so, the Fed might fail to lower borrowing costs in 2025. This would create a divergence in policy outlooks with other major central banks.
Major economies like the Eurozone and Canada have been shaky due to high interest rates. Therefore, these central banks have maintained an aggressive easing cycle that might continue in 2025. Moreover, if Trump implements his tariff proposal, these economies might slow down further.
The president-elect has threatened to impose a 25% tariff on goods from Canada. He has also targeted the Eurozone and China. Additionally, recent reports have shown that he might declare a national emergency to facilitate these tariffs.
US inflation expectations (UoM Survey of Consumers)
Elsewhere, a University of Michigan survey showed that consumers raised their one-year inflation expectations from 2.8% to 3.3%, further supporting the dollar. The shift came amid Trump tariff concerns.
On Friday, the Canadian dollar held steady against a rallying dollar after data revealed that the local economy added 90,900 jobs compared to estimates of 24,900. At the same time, the unemployment rate eased to 6.7%, indicating robust demand.
On the other hand, the yen also recovered after an initial decline amid reports that the BoJ might raise its inflation forecasts in January. This news pushed up the likelihood of a near-term rate hike.
