Dollar Slips, Investors Await US Jobs Report

What’s going on here?

The dollar slipped slightly on Monday but remained near its two-week high, supported by rising long-term Treasury yields, as investors look ahead to Friday’s crucial US jobs report.

What does this mean?

The anticipation for the US jobs report is high due to its potential influence on the Federal Reserve’s rate decisions. Fed Chair Jerome Powell’s focus has shifted from inflation to employment, raising the stakes. A modest 25-basis point rate cut seems likely, with GDP figures indicating economic stability. However, if the employment data disappoints – especially if new jobs fall below 100,000 – the Fed might consider a more aggressive 50-bps cut. Current trader expectations show a 33% chance for the latter, down from 36% last week.

Why should I care?

For markets: Eyes on the data.

Monday’s US public holiday slowed trading, but this week promises a stream of economic data culminating in Friday’s non-farm payrolls. A forecasted rise to 165,000 new jobs in August could support a 25-bps rate cut, but a significantly lower figure might push markets to bet on a 50-bps cut, impacting stocks and bonds. The dollar’s strong position reflects cautious optimism, but expect potential volatility.

The bigger picture: Global economic shifts coming.

Athanasios Vamvakidis of Bank of America predicts a weakening dollar in the second half of the year, targeting the euro at $1.12. Political instability in Europe, with Alternative for Germany (AfD) eyeing regional election victories, could affect this shift. The ECB, facing persistent inflation, has scaled back future rate cut expectations. Together with cautious optimism in Germany’s unemployment and inflation data, global markets might be in for a rollercoaster.