What the latest US jobs figures mean for currencies

By the OFX team | 12 February 2024 | 4 minute read

An unexpectedly strong jobs report in the United States has changed the course of currencies this year.

The smart money was betting that the US Federal Reserve could start cutting interest rates as early as March. That would have put downward pressure on the US dollar..

What was expected to happen

US inflation, which has remained above the Federal Reserve’s target rate for three years, was finally coming down after interest rates were ratcheted up to their highest level in 23 years.

In 2021, when post-Covid stimulus was greatest with interest rates effectively zero, inflation grew at a worrying 7% annually. It moderated only slightly in 2022, when it fell to 6.5%, even in the face of seven rate hikes — from effectively zero to 4.5 per cent — that year¹.

Four more rate hikes in 2023 finally started to push that stubborn inflation down to 3.4%, miraculously without causing a recession. Such soft landings from aggressive rate hikes are very rare.

With inflation seemingly under control, US Federal Reserve Chair Jerome Powell suggested late last year that 2024 was the year rates would be cut². (Lower interest rates, reduce the yield, or return, on US dollar assets, and with it demand for US dollars.)

Currency markets reacted. From October to the end of last year, the US dollar fell 6.7 per cent against a basket of major currencies³ as investors bet that interest rates would fall early in the new year.

The Federal Reserve surprises financial markets

On January 31st, all eyes were on the Fed chair with the expectation he would announce rate cuts as soon as March. Bond prices suggested there was a 90% likelihood of a rate cut, but when Mr Powell issued his statement on the Fed board’s deliberation, he gave no indication a cut was imminent, instead suggesting that more data was needed to show the economy was cooling.

“We do have confidence but we want to get greater confidence⁴,” Mr Powell said.

The dollar shot up instantly once a March rate cut was effectively off the table. The dollar index rose 0.26 per cent on the day. The euro dropped by 0.4 per cent, the lowest it has been against the dollar since early December⁵.

Jobs figures surprise markets even more

A few days later, new data put a large exclamation point on Powell’s statement.

The jobs report on February 3 showed the US economy added 353,000 workers to their payrolls in January. Hourly wages also jumped 0.6% month on month, the highest wage growth since March 2022.

A stronger jobs market suggests that workers are more likely to negotiate for higher wages. Given wage growth is one of the most significant contributors to inflation and inflation expectations, that means more heat that needs to come out of the economy if the US Federal Reserve is to get inflation back to its target of 2 per cent.

In short, no rate cuts.

Recognising this, the US dollar was bid up nearly a full per cent against comparable currencies. The UK pound had its biggest fall against the US dollar since October, while the Swiss franc had its worst day since May⁶.

US seems to have pulled off the softest of landings

Many economists had expected the US to go into a recession this year⁷, and the unemployment rate would rise to 4.6 per cent. After the February figures, that number is now 3.7 per cent.

The recent global outlook from the International Monetary Fund (IMF) showed that the US would far outpace other regions when it comes to growth.

It forecasts 2.5 per cent GDP growth compared to 0.5 per cent for the Eurozone and the UK, 1.9% for Japan, and 1.4 per cent for Australia and Canada.

That sweet spot of moderate growth, even in the face of two-decade high interest rates, doesn’t seem to be coming at the expense of high inflation.

While wages grew 0.6 per cent, the highest since March 2022, the overall inflation picture is looking positive according to Mr Powell.

“We’ve had a very strong labour market, and we’ve had inflation coming down. We look at stronger growth — we don’t look at it as a problem.⁸”

What it means for currencies

Markets are now betting that US rates won’t come down until the middle of the year. That is not the case for other jurisdictions.

Given the disparity in growth rates, as forecast by the IMF, those other major economies may have to cut their rates sooner to get their economies moving. Inflation is still an issue in many countries, with energy prices still impacted by the war in Ukraine and the shipping issues that are unfolding in the Middle East.

But those issues are also crimping growth, particularly for countries reliant on energy imports. Slow global demand — global growth forecast to be 3.1 per cent by the IMF⁹ — is hurting trading nations like China, and commodity currency countries like Australia and Canada, who sell raw materials to the likes of China. Central banks in many jurisdictions will be keeping one eye on inflation, but it is likely they are now more worried about growth, and cutting interest rates to get there.

By contrast, the US has its own economic momentum thanks to the size and wealth of its population, and it is energy independent. It may not need to cut rates to stimulate demand.

The wider the gap between caused by the US holding rates steady, as other countries start cutting, the more upward pressure on the US dollar.

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