A series of weaker-than-expected US labor market reports has triggered a reassessment of Federal Reserve (Fed) rate hike expectations, leading to a softer US Dollar and shifting global currency dynamics [1][2][5][6]. The July US nonfarm payrolls report showed a decline of 23,000 jobs versus an expected gain of 80,000, with downward revisions further cooling expectations for a September Fed rate hike [5]. Average hourly earnings growth also slowed, with the year-on-year rate falling from 3.5% to 3.2%, marking a return to pre-Covid levels and signaling reduced inflationary pressures from the labor market [1].
Market participants are now focused on the upcoming Consumer Price Index (CPI) release, scheduled for Wednesday, which is seen as the most important data point for rates markets this week [1][5][6]. According to MUFG, the probability of a September Fed hike has dropped from 55% to 40%, though caution prevails as two CPI reports and another jobs report remain before the next Federal Open Market Committee (FOMC) meeting on September 16 [1]. Bank of America Global Research maintains that a September hike is still "firmly in play," but CME Group's FedWatch gauge suggests higher odds for an October move [6].
The softer US labor data has supported a modest upside bias for the Euro against the Dollar, with Rabobank forecasting EUR/USD to reach 1.16 in three months, assuming no major Eurozone growth surprises [2]. Meanwhile, the Japanese Yen has found support from rising Japanese Government Bond yields and increased market pricing for a Bank of Japan rate hike, with a 50% chance of a 25bp hike in September and a full hike by year-end [3]. In Norway, softer-than-expected core inflation has sharply reduced the probability of a Norges Bank rate hike, though guidance for another increase is expected to be retained [4].
Analysts note that the environment has become more supportive for risk assets and duration, but warn that a stronger-than-expected inflation print could quickly reverse the recent easing in Fed pricing and put upward pressure on yields [5]. Economic commentators highlight that, despite the weaker jobs report, inflation remains above the Fed's 2% target, and the outlook for interest rates is "higher for longer," which could further increase borrowing costs for consumers [6].
CONCLUSION
The weaker US jobs data has tempered expectations for imminent Fed rate hikes, pressuring the Dollar and supporting other major currencies. However, with inflation still above target and key CPI data ahead, markets remain cautious. The upcoming inflation report will be pivotal in shaping the Fed's next moves and broader market sentiment.