- The US employment report revealed some weaknesses in the labor market.
- The US unemployment rate was much higher than expected, at 3.9%.
- Canada’s employment gain confirmed that the BoC will take time before cutting rates.
Currency futures reached new heights on Friday as the dollar weakened after a mixed jobs report. Notably, the US employment report revealed some weakness in the labor market, supporting the view that rate cuts will come later in the year. As a result, most currency futures rose to new highs before pulling back as Friday’s session ended.
US employment report (Source: US Bureau of Labor Statistics)
Data from the US revealed a bigger-than-expected increase in jobs in February. However, the unemployment rate also came in much higher than expected, at 3.9%.
The US labor market has played a significant role in shaping the outlook for Fed rate cuts. Since it has remained resilient, the Fed has hesitated to declare victory over inflation. If demand is high in the labor market, consumers have more money to spend, which drives inflation. Therefore, the Fed is keen to see a weaker labor market that will allow inflation to drop to the 2% target.
Consequently, the report on Friday showed that conditions are aligning for the Fed to start cutting rates. Notably, Powell said earlier that the Fed was gaining more confidence and that inflation was declining. Therefore, there is a higher chance the central bank will start cutting rates in the second half of the year.
Meanwhile, investors expected the Bank of Japan to shift policy in the opposite direction. Market participants and policymakers are becoming more confident that the BoJ will start hiking rates soon. As a result, the yen strengthened against the dollar on Friday.
Policymakers expect better wage growth this year in Japan, likely driving inflation. With the Fed looking to cut rates, the diverging policy outlooks could drive the yen much higher in the coming weeks.
Elsewhere, the Canadian dollar made new highs on Friday before closing lower. The currency initially strengthened after an upbeat jobs report from Canada contrasted with the slightly poor US employment report. Canada’s employment gain confirmed that the Bank of Canada will take time before cutting rates.
The euro also gained amid dollar weakness before pulling back. On Thursday, the ECB held rates but signaled rate cuts later in the year. Both the Fed and the ECB are preparing to reverse their monetary policies. Meanwhile, the Bank of England remains hawkish, supporting the pound.
