Written by US jobs report details reveal further softness in labor market
The US dollar ended Tuesday lower against most of its major counterparts, gaining some ground only against the aussie. Today, the greenback is recouping losses, recovering the most against the pound and the yen.
The main event on yesterday’s agenda was the US employment report for November. The report revealed that non-farm payrolls increased by 64k, beating estimates of 50k. That said, the unemployment rate rose to 4.6% from 4.4%, while for October, it was estimated that the US economy lost a staggering 105k jobs.
Although the US government shutdown may have distorted the data, investors remained convinced that the Fed will need to cut interest rates more than once in 2026, contradicting the Fed’s new dot plot, which pointed to a sole 25bps reduction for next year. Currently, investors are assigning a 25% chance of another rate cut in January, while they are penciling in a total of 58bps worth of reductions by the end of next year.
Focus to turn to Thursday’s US CPI data
That said, even with traders remaining dovish, the greenback is recovering ground today, perhaps due to remarks by Atlanta Fed President Raphael Bostic, who said that further rate cuts could risk a new jump in inflation and inflation expectations.
With that in mind, dollar traders are now likely to shift their attention to Thursday’s US CPI data for November. Should the data confirm that inflation in the US remains sticky, around a full percentage point above the Fed’s inflation objective of 2%, investors may start thinking that 58bps worth of rate cuts are too many for next year, thereby allowing the dollar to extend its recovery.
However, with most Fed officials appearing concerned about the performance of the labor market, the repricing is unlikely to be massive, and the dollar’s recovery could remain limited.
UK inflation slows more than expected, pound suffers
The pound came under strong selling pressure today after the UK CPI data pointed to a larger-than-expected slowdown in inflation for November. With both the headline and core rates now resting at 3.2%, and the BoE itself projecting that the latest budget announced by finance minister Reeves will lower the inflation rate by 0.5 percentage points by the end of 2026, investors may be more convinced that the Bank will proceed with more rate cuts.
They are almost confident that a 25bps reduction will be delivered tomorrow, while they are baking into the cake another 40bps worth of reductions for 2026. Therefore, should the BoE deliver a dovish cut tomorrow, the pound is likely to extend its decline, especially against the euro if the ECB maintains its “in a good place” mantra and corroborates once again investors’ bet that they are done easing.
Wall Street ends session mixed, oil recovers on Trump’s threats
On Wall Street, the Nasdaq recovered somewhat yesterday, but the S&P 500 and the Dow Jones closed lower, driven by declines in energy and healthcare stocks. This suggests that the softness revealed in the US jobs report has helped stocks of high-growth tech firms as dovish rate expectations are supportive for present values (PV).
That said, with the forward price-to-earnings ratio of the S&P 500 remaining very close to its 2020 highs, concerns about extremely high valuations are likely to persist. A set of US CPI rates on Thursday suggesting sticky inflation could result in another corrective retreat.
Oil prices extended their tumble on Tuesday on progress in talks about resolving the war in Ukraine, but they rebounded today after US President Trump ordered “a total and complete” blockage of sanctioned oil tankers entering and leaving Venezuela.
By XM.com
