US dollar bounces as strong jobs report likely delays Fed easing this year

British Pound

Reuters: The pound was headed for a fourth consecutive weekly gain against the dollar on Friday, its longest rally since March last year, as investors prepared for data on the health of the U.S. labour market that could shape the outlook for U.S. rates. Sterling was unchanged at $1.2789 at 0915 GMT. On a weekly basis, sterling is set for a rise of 0.4% and is around its highest since March, having topped $1.28 earlier in the week. But much of that rally has been the result of dollar weakness, rather than pound strength. Against the euro , sterling has performed far more modestly recently.

It is roughly flat against the single European currency, a day after the European Central Bank delivered its first rate cut in five years. That said, the pound is not far off its strongest against the euro since October 2023, largely down to the expectation among investors that the Bank of England will not lower interest rates until later this year. Money markets show traders currently believe UK rates could fall to around 4.82% by December, from 5.25% right now. ECB rates are now at 3.75% and are expected to fall by at least another quarter point, and possibly by half a point, by year-end.

Friday's session will be dominated by U.S. non-farm payrolls, which economists expect to have risen by 185,000 in May. Traders are currently pricing in two quarter-point rate cuts from the Federal Reserve this year, with the first most likely in September. There is a slimmer chance of two UK rates this year, given that some metrics, such as wage growth and service-sector price pressures, are still well above the Bank of England's comfort zone, even if headline inflation has slowed substantially. Next week brings data on UK economic growth and employment, which could offer investors a steer on what to expect from the BoE in the coming weeks.

Bad weather over April and May has weighed on metrics such as consumer spending, but other data points, such as business activity, are showing signs of weakness too. "Of late much has been made of the wet weather, but for us the continued use of this ‘explanation’ is starting to wear thin, with signs of genuine weakness in demand here rather than merely attributable to the weather," Santander UK economist Gabriella Willis said. "A quarter of tepid growth would probably be perfect for the BoE right now, 'not too hot, nor too cold', giving the BoE time without a sharp contraction in activity forcing its hand with early cuts and without strong demand reigniting more robust price-setting behaviour," she said.

US Dollar

Reuters: The U.S. dollar rebounded on Friday after data showed the world's largest economy created a lot more jobs than expected last month, suggesting that the Federal Reserve could take time in starting its easing cycle this year.

The dollar index, which tracks the currency's value against six major peers led by the euro, rose 0.8% to 104.91, its best daily gain since April 10. For the week, the index was on track for a 0.2% gain, with the strong jobs number offsetting a run of weaker macro data that had earlier prompted investors to put two quarter-point Fed rate cuts back on the table in 2024.

U.S. nonfarm payrolls expanded by 272,000 jobs last month, data showed, while revisions showed 15,000 fewer jobs created in March and April combined than previously reported. Economists polled by Reuters had forecast payrolls advancing by 185,000. Average hourly earnings rose 0.4% after having slowed to a 0.2% rate in April. Wages increased 4.1% in the 12 months through May following an upwardly revised 4.0% annual rise the prior month. The unemployment rate, however, edged up to 4% from 3.9% in April, breaching a level that had previously held for 27 straight months.

"The markets and the Fed bow down to the holy grail of one number, and it is the payrolls report. Of course, it is not just about that headline print but also the higher-than-expected wage number," said David Rosenberg, founder and president of Rosenberg Research in Montreal. "But as they say — 'it is what it is.' And because we know what the Fed is laser-focused on, and how the Fed is so omnipresent when it comes to market activity in stocks and bonds, consider this to be a bearish report because it simply will embolden the hawks on the Federal Open Market Committee."

The FOMC is not expected to make any change at its policy meeting next week. Following the jobs data, the rate futures market has priced in just one cut of 25 basis points this year, either at the November or December meeting, according to LSEG's rate probability app. The chances of a rate cut in September declined to about 50.8% post-jobs, from around 70% late on Thursday. The dollar rose 0.6% against the yen to 156.64. The U.S. currency was still down 0.4% on the week, on track for its worst weekly performance since late April, or around the time Japanese monetary authorities stepped in to the market to prop up the yen.

Like the Fed, the Bank of Japan decides rate policy next week, and consensus is building in the market for an imminent reduction in its monthly bond purchases as a means of tightening credit conditions. Despite recent firmness, the yen remains not far from the 34-year trough beyond 160 per dollar reached at the end of April, which prompted Japanese officials to spend some 9.8 trillion yen intervening in the currency market to support it. The euro, meanwhile, dropped 0.8% versus the dollar to $1.0803.

On the week, Europe's single currency slid 0.4%, its largest weekly percentage loss since the week starting April 8. The currency's losses also came a day after the European Central Bank cut rates in a well-telegraphed move, but offered few hints about the outlook for monetary policy given that inflation is still above target. Sterling, meanwhile, retreated 0.5% against the dollar to $1.2722 after earlier in the session hitting $1.2825, the highest level since mid-March.

South African Rand

Reuters: The South African rand gained on Friday, after the African National Congress said it would seek to form a government of national unity following its failure to win a majority in last week's election. At 1505 GMT, the rand traded at 18.88 against the dollar, around 0.6% stronger than its previous close. ANC leader Cyril Ramaphosa said late on Thursday that the former liberation movement would invite other political parties to form a government of national unity, a similar arrangement to the one after 1994's historic all-race vote that ended apartheid.

The ANC said it had already held constructive talks with parties including the far-left Economic Freedom Fighters and pro-business Democratic Alliance. Investec chief economist Annabel Bishop said in a research note the markets took the announcement on unity government as slightly positive but are still following a "wait and see" approach. In domestic economic data, South Africa's net foreign reserves rose to $58.287 billion at the end of May, from $57.851 billion in April, central bank data showed. On the stock market, the Top-40 index ended around 0.6% lower. The benchmark 2030 government bond was firmer, the yield down 10.5 basis points to 10.540%.

Global Markets

Reuters: Asian stocks sank on Monday as traders heavily pared back on bets for Federal Reserve rate cuts this year given a still-tight U.S. labour market, while a snap election call in France sparked wider political concerns and weighed on the euro. Trading was thinned in Asia with Australia, China, Hong Kong and Taiwan out for public holidays, but MSCI's broadest index of Asia-Pacific shares outside Japan still slumped 0.46%.U.S. futures eased slightly, with S&P 500 futures and Nasdaq futures down about 0.03% each, while the dollar was back on the front foot.

The halt in the global risk rally came on the back of Friday's nonfarm payrolls report which showed the U.S. economy created far more jobs than expected in May and annual wage growth accelerated, underscoring the resilience of the labour market. Futures now show roughly 36 basis points worth of cuts priced in for the Fed, down from 50 bps last week. The odds for an easing cycle beginning in September have also lengthened. The latest developments come ahead of the Fed's policy decision on Wednesday, with U.S. inflation figures for May due just before that.

"It's going to be very difficult for the Fed to continue predicting three rate cuts this year," said Rob Carnell, ING's regional head of research for Asia-Pacific. "Quite a few of the Fed speakers are talking about the possibility of just one cut. While the most likely outcome is we'll see the three move to two, it is possible we just get a move to one. "U.S. Treasury yields similarly rose on Monday, reflecting the higher-for-longer U.S. rate expectations. The two-year yield and benchmark 10-year yield each ticked up about 1 bp to 4.8826% and 4.4414%, respectively.

Against the dollar, the yen fell 0.1% to 156.87. The dollar index, which measures the greenback against a basket of six peers, firmed to 105.10.The Bank of Japan also holds its two-day monetary policy meeting this week and could offer fresh guidance on how it plans to scale back on its massive bond purchases. Japan's Nikkei took advantage of the weaker yen and rose 0.42%. The Bank of Japan also holds its two-day monetary policy meeting this week and could offer fresh guidance on how it plans to scale back on its massive bond purchases.

Over in France, President Emmanuel Macron on Sunday called snap legislative elections for later this month after he was trounced in the European Union vote by Marine Le Pen's far-right party. Macron's shock decision set off a political earthquake in France, offering the far-right a shot at real political power after years on the sidelines and threatening to neuter his presidency three years before it ends. The euro tumbled to a one-month low in the wake of the announcement amid growing uncertainty over Europe's future political direction.

It was last 0.25% lower at $1.07735. Futures similarly fell, with EUROSTOXX 50 futures losing 0.38% while FTSE futures slid 0.7%. French bond futures shed 0.2%. "Macron's decision, seen as a calculated risk, comes as he struggles with a parliamentary majority, making legislative progress difficult," said Shier Lee Lim, Convera's APAC lead FX and macro strategist. "We remain bearish on the euro in the short term." In commodities, oil prices last traded higher, reversing slight falls from earlier in the session owing to a stronger dollar. Brent crude futures gained 0.13% to $79.72 a barrel, while U.S. West Texas Intermediate crude futures ticked up 0.16% to $75.65 per barrel. Spot gold rose 0.18% to $2,296.65 an ounce.

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