Dollar soars as bullish job report confirms Fed on track to hike interest rates

Enrique Díaz-Álvarez09/Μαρ/2015Currency Updates

The US Dollar last week continued its seemingly unstoppable progression. The absence of critical information coming from either the Bank of England or the ECB this week set the spotlight squarely on the US February jobs report. An unambiguously strong number added fuel to the Dollar rally, which ended up 1.5% or more against all of its major peers. As emerging market currencies continue to stumble, we are seeing Dollar gains of several times that amplitude against the most vulnerable ones, like the Brazilian Real and the Turkish Lira. The ability of the greenback to continue to rally, in the face of an increasingly unanimous bullish view among traders and strategists, is nothing short of remarkable.


The PMI indices of business confidence out last week were consistent with our view of a modest acceleration of growth into the first quarter of 2015. February levels managed to sustain the January bounce. Both the manufacturing and the services indices are considerably above their long-term average; particularly encouraging are the high levels of the services employment sub-index (at around 57), which bode well for further positive surprises from the labour market. This news reaffirms our expectation for an interest rate hike from the Bank of England before the end of 2015. However, they provided little support for Cable, which fell against the Dollar in tune with all other major currencies last week.


President Draghi is evidently anxious to step back from the limelight of the past few weeks and lower the level of drama surrounding ECB meetings. Last week, Draghi announced an upward revision to the staff forecast expectations for economic growth, gave a few technical details about the implementation of the bond purchase program, and little else. The first purchase will be today, and no bonds will be bought unless the yield more than -0.2% – not exactly a demanding standard. We expect the ECB to stay out of the headlines and allow the latest program to do its work.

Macroeconomic news out of the Eurozone was again quite encouraging. Retail sales in January surged on the month, and are now 6.3% above the fourth-quarter level. It thus appears that domestic demand is recovering smartly, just as the cheaper Euro provides a simultaneous boost to the external sector. It is now quite likely that we will see another increase in first quarter GDP, albeit from the modest levels of the fourth-quarter.


All eyes were on the February jobs report out Friday, and the Bureau of Labor Statistics did not disappoint. We saw the latest in a string of strong reports. 295,000 net jobs created, unemployment down another notch to 5.5%. Wage growth was somewhat weaker, with the hourly wage up just 0.1% for the month, but still up 2.0% YoY, comfortably above inflation. Unemployment is now within sight of the upper band of what the Federal Reserve constitutes as full employment. Overall labor compensation is growing steadily, as jobs are created and modest wage hikes are doled out. It is becoming increasingly clear that an emergency setting is no longer appropriate for US interest rates, and therefore the markets were busy re-pricing their expectations for the timing of the first hike. Interest rate futures put the odds now at 1 in 4 for June, 1 in 3 for July, and slightly over half for September. Unsurprisingly, the Dollar rallied strongly on the back of Friday’s numbers against every one of its peers, to fresh multi-year record highs.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.