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February jobs report boosts Dollar Bulls

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Market consensus for the February jobs report was tilted to a softer release but the actual data released by the Bureau of Labor statistics showed yet another solid performance in the US labor market for the month of February.

Nonfarm employment change rose to 295k, above estimates of 240k while the unemployment rate improved to 5.5%, down from 5.7% the previous month and beating estimates of 5.6%. The jobs data for the month of January was however revised lower to 239k, from 257k.

While the subcomponents of the labor data was softer, especially the average hourly earnings rising 0.1% for the month, below estimates of 0.2%, the markets shrugged off the weaker news as overall the jobs report was seen as being robust, despite concerns about a weather induced noise.

The main takeaway from the February jobs report were:

  • February release marks 12th consecutive month of gains above 200k mark
  • The three-month moving average of the jobs is now at 290k
  • Labor force participation rate is at a steady 62.7% – 62.9%

The upbeat jobs data saw the Greenback soar across the board as the markets remain divided between a June or a September rate hike. The US Dollar was trading in a tight range for the past few weeks after entering a consolidation phase as the Friday’s jobs report saw a bullish breakout to the upside. The US Dollar index now looks poised to test the psychological level of 100, last seen in 2003.

More importantly, as the FOMC meets next week on March 18th, the markets at large expect to see the Fed remove the word “patient” from its language and prepare the markets for a possible lift off in the Fed funds rate. Rhetoric from various Fed members also marks a bigger perspective for a lift off in interest rates this year with the exception that the members would like to see the inflation rate pick up a bit more from current levels of 1.6%, just below the Fed’s target inflation rate of 2%.

The revival of the bulls in the US Dollar Index weighed down on currencies such as the Euro and the Canadian dollar, both of which weakened to historic lows. EURUSD broke down below the 1.1 handle while the Loonie was back above 1.26 handle. Consensus expects EURUSD to reach parity by the end of this year while the USDCAD could likely trade near the highs of 1.28 through 1.3.

The week ahead has little to offer with the exception of the PPI, UoM expectations and Core retail sales in the run-up to next week’s FOMC meeting. The US Dollar could likely drift along and probably dip lower ahead of the FOMC statement, which if meets expectations and the Fed drops the word “patience” could see the current leg up in the rally gain further momentum.

Although the sentiment at large remains bullish for the US dollar, the next couple of FOMC meetings will be critical as well as any following inflation and US jobs reports in the coming months. Overall, we can expect to see volatility being maintained in the US Dollar for the coming months.

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