Markets will be looking at the major data release for the week on Friday, and will take a break from geopolitical news to focus on something more familiar: market risk around US jobs numbers. January’s NFP came in surprisingly strong, but analysts almost immediately questioned whether the data would be revised in the February release. Or, January could just be an outlier. Those questions will be answered on Friday and could be pivotal for how the markets behave, assuming no major developments on the Iran front.
The main issue is that US labour data has become the key factor in the Fed’s rate outlook. With inflation still above target, the Fed would just keep rates elevated. But weak labour data has activated the second mandate to maintain full employment. So, if the jobs market shows continued signs of resilience, then the reasons to expect a rate cut evaporate.
The Dollar Rising Despite No Fed Change
The dollar is already higher as traders dive into safe havens amid the uncertainty from the war in the Middle East. However, expectations for a Fed rate cut have remained largely unchanged despite the geopolitical turmoil. That means the dollar could react if there is a major deviation from expectations in the upcoming data.
After the strong January print, even the ultra-dove and Trump appointee Steven Miran said that rate cuts might not be as necessary as they were. He expressed concern that inflation would remain sticky. If the Strait of Hormuz remains closed for an extended period, higher energy prices would filter through the economy. That would put another bump higher in inflation, and keep the Fed from cutting. In fact, it might even become possible that the Fed might hike.
Gold Can’t Keep Up With the Dollar
Another important Forex asset that could be affected is gold, which jumped amid the uncertainty caused by the attack on Iran. But it has retreated mid-week amid a stronger dollar and a crash in Asian markets. Economies in the Far East are highly dependent on energy that passes through the Strait of Hormuz, and higher costs could impact growth.
The sell-off in Asian stocks has created a demand for liquidity, prompting investors to sell gold and take profits in other precious metals. Generally, gold benefits from expectations of Fed rate cuts. So, gold could get a boost if the upcoming NFP figures are lower than expected.
What the Market is Looking For
The consensus among economists is that the US February NFP will come in at 60K, less than half the 130K reported in January. However, the previous months’ reading could be revised lower. Meanwhile, the unemployment rate is anticipated to remain unchanged at 4.3%. So too are average hourly wages at 3.7%, one of the factors pressuring inflation to the upside.
If the data comes in towards the top of expectations, it could mean that January’s number was not an outlier, and the market could price out a Fed rate cut in the first half of the year. This could give the greenback another boost. On the other hand, if the results fall below expectations, traders could start to hope for an earlier rate cut and weaken the dollar.