The U.S. dollar rebounded from an initial dip against its rivals following the December jobs report, but still registered its third consecutive weekly loss. The employment report came in below expectations and showed that wage growth remained sluggish, turning the greenback negative before it bounced back.
The data could lead analysts to reassess their expectation for interest rate increases in 2018, which the Federal Reserve put at three.
What are currencies doing?
The ICE U.S. Dollar Index DXY, +0.16% was last 0.1% higher at 91.975, while the broader WSJ U.S. Dollar Index BUXX, +0.06% was up 0.1% at 85.67. The ICE index is on track to post a 0.2% decline in this first week of 2018, continuing the downward trend of the last two weeks of the old year, according to FactSet. The WSJ index slipped 0.4% on the week.
Elsewhere in North America, the Canadian dollar USDCAD, -0.6006% rallied against its U.S. counterpart. The buck last bought C$ 1.2412, its lowest level since September, compared with C$1.2487 late Thursday. On the week, the loonie, as the Canadian currency is also called, jumped 1.3% against the buck.
See: Bank of Canada interest-rate-hike expectations for January soar after jobs data
The euro EURUSD, -0.2983% was down at $1.2039 from $1.2068 late Thursday in New York, after briefly trading in positive territory. Still, on the week, the euro is on track for a 0.3% gain. On Thursday, the shared currency traded at its highest level since January 2015, but was unable to defend its gains even in the face of supportive inflation data.
Read: What’s next for the euro in 2018? It’s set to be deja-vu all over again
The British pound GBPUSD, +0.1254% traded higher at $1.3567 on Friday, versus $1.3552. On the week, the pair gained 0.4%
Against the Japanese yen USDJPY, +0.26% the dollar was stronger, trading at ¥113.12—a seven-day high—up from ¥112.75 on Thursday, and up 0.4% on the week.
Also read: Here’s why South Africa’s currency isn’t fazed by Cape Town’s water crisis
What is driving the markets?
The dollar was whacked lower as the market reacted to the weaker-than-expected jobs report. The U.S. added only 148,000 jobs in December, compared with the MarketWatch consensus forecast of 195,000. Wages grew by 2.5% in the 12 months leading up to December, compared with 2.4% in the previous month. Wages are also used as a gauge for inflation, which has been stubbornly low.
Analysts, as well as central bankers, continue to grapple with the U.S. economy, which is close to full employment and expanding, while wages remain subdued.
The minutes from the December Federal Reserve meeting out earlier this week showed policy makers were relatively upbeat on the outlook for the U.S. economy, but still worried about the persistently low inflation levels.
The Fed penciled in three rate increases in 2018, but market participants are beginning to take this number with a grain of salt. Earlier in the session, Philadelphia Fed President Patrick Harker shared his expectation of only two interest rate increases in 2018.
Elsewhere, a soft December inflation report was weighing on the euro and posed some risk for those betting on strengthening of the shared currency. The December flash reading of harmonized eurozone CPI was 1.4%, in line with estimates, but below the previous month’s 1.5% reading. Core inflation slowed to 0.9% across the eurozone, falling below the FactSet consensus of 1%, but remaining in line with the November figure.
What are strategists saying?
“The headline number was weaker and the revisions weren’t great,” Luke Bartholomew, investment strategist at Aberdeen Standard Investments, said of the jobs report and the lower wage growth number. “The Phillips curve is still missing in action. But I think to say that the Fed made a policy error in December is too strong. For all its weakness, the report was still far from catastrophe.”
The Phillips curve describes the historically inverse relationship between unemployment and inflation.
“With annualized CPI in December at 1.4% there is still clearly some way to go before monetary policy can start to normalize, even though core CPI […] is up 1.1%,” Jacob Deppe, head of trading at online platform Infinox, said of the eurozone inflation data. “Not even the ECB expects inflation to return to target this year, but if signs are that it is on course to do so […] the end of quantitative easing in September looks likely.
What are the data?
The unemployment rate stood at 4.1% in December, in line with the MarketWatch consensus forecast. Average hourly earnings rose 0.3% in the same month, in line with the estimate.
The foreign trade deficit widened to $50.5 billion in November, rising from $48.7 billion to its highest since January 2012.
The ISM nonmanucturing index showed declined to 55.9 in December, compared with a consensus expectation of 57.7. A reading of 50 or better indicates expanding activity.
Factory orders for November grew by 1.3%, beating estimates of 1.1% and the previous month’s 0.4% growth.
Meanwhile, Canada also reported employment figures, with the Labor Force Survey jumping to 78,600, beating the consensus of a 12,500 decline in December. The unemployment rate fell to 5.7% from 5.9%.