- The dollar fell last week as tensions between the US and Iran eased.
- The US economy unexpectedly lost 23,000 jobs in July.
- Experts believe the US CPI headline number will ease from 3.5% to 3.4%.
Currency futures remained elevated on Monday as the dollar wallowed near a two-month low after Friday’s jobs report. The US economy unexpectedly lost jobs in July, leading to a decline in Fed rate hike expectations. This week, all eyes will be on the US consumer inflation report for more cues on Fed policy.
The dollar fell last week as tensions between the US and Iran eased. Talks in the Middle East raised hopes for the reopening of the Strait of Hormuz. At the same time, market participants were hoping for a ceasefire deal and more talks towards a longer-lasting peace deal. Oil prices pulled back, and the dollar lost its safe-haven shine.
However, reports on Friday revealed that Iran released a restrictive draft for traffic through the Strait. According to reports, Tehran plans to ban US and Israeli ships from using the Strait. Moreover, ships from other countries that were allied to the US and Israel during the war would have to pay heavy tolls before using the Strait. The news sent oil prices higher as it would create more conflict in the Middle East. However, given that it is only a draft, there is still room for changes.
The decline in oil and the dollar during the week supported currency futures. Still, the biggest catalyst was the nonfarm payrolls report on Friday. According to the report, the US economy unexpectedly lost 23,000 jobs in July. Economists had forecasted an addition of 85,000 jobs. Moreover, the previous reading was revised lower, painting a picture of a rapid slowdown in the labor market. The Federal Reserve is very sensitive to labor market data.
USD dollar bets (Source: CFTC, Bloomberg)
A weak labor market leaves very little room for policymakers to hike borrowing costs. As a result, rate hike expectations and bets on a stronger dollar eased. Before the report, traders were placing a 67% likelihood for a rate hike in September. This figure dropped to 44% after the data, boosting currency futures.
Furthermore, if tensions in the Middle East remain elevated and oil keeps climbing, the Fed will have a difficult task of balancing growth and inflation. The US will release its crucial CPI report next week, and experts believe the headline number will ease from 3.5% to 3.4%.
