The release of US jobs data earlier in the week was generally interpreted as supporting more hawkishness from the Fed. However, there were some mixed signals in the data. That means that the market might be open to a reversal depending on what happens with the CPI figures on Friday.
Both NFP data and CPI were delayed due to the partial government shutdown last week. This has concentrated the risk events for the dollar and gold. In the wake of the NFP figures, gold prices initially fell, then recovered, before resuming a downward trend. This volatility suggests that markets are still trying to figure out how the data affects the monetary policy outlook.
What Moved the Market
January NFP came in at 130K, well above the average and even above the range of estimates. It was the first triple-digit reading in months, implying the US jobs market could be recovering in 2026. But it needed to be contextualized amid downward revisions in prior months, and the expectation that this figure could also be revised in the future. On top of that, the report showed that 2025 was the slowest non-recession hiring year since 2003.
This sets a relatively low baseline for the labor market going into 2026. Which means that a relatively small improvement in the data could signal recovery and keep the Fed from hiking rates. Crucially, the unemployment rate unexpectedly ticked down to 4.3% from 4.4% prior. A small move, but at a rate around the structural level, which means the job market is tightening. A tight labour market would put upward pressure on inflation, satisfying both of the Fed’s criteria for keeping rates unchanged.
The Fed Outlook
Before the data, the market was looking at around a 20% chance of a rate cut at the next FOMC meeting in March. After the data, that chance was practically erased, and markets are now waiting for June for a rate cut.
This could get in the way of the expected push to lower rates when Fed Chair Jerome Powell’s term ends in May. US President Donald Trump once again pushed for lower interest rates this week, saying the US should have the lowest rates in the world. That would mean cutting rates below the BOJ’s (currently 0.5%). While this might weaken the dollar, US Treasury Secretary Scott Bessent affirmed the Administration’s commitment to a strong dollar. He also cut short any speculation that the US was intervening to support the yen. All of this suggests that fiscal policy will be data-driven, albeit with a bias toward lowering rates.
What to Look Out For
The market’s focus now turns to Friday’s release of January CPI data, which has been delayed by a couple of days. The consensus is for headline inflation to dip to 2.5% from 2.7%, driven mostly by a decline in fuel prices. This is still above the Fed’s 2.0% target, but if it continues to decline, it could eventually be in a position to cut rates.
The FOMC pays closer attention to the core rate, which excludes volatile elements such as fuel and food costs. This is expected to also decline to 2.5%, but from 2.6%, a more modest cooling pace. The decline in inflation could indicate that the effect of tariffs is wearing off. If inflation is lower than anticipated, it might bring back hope that the Fed will cut rates sooner. But if inflation remains high, the markets could push back the next cut to the third quarter, a move that would likely support the dollar.
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