A blowout jobs report aides Powell’s cautious messaging on rate cuts


This is a “good economy” was Federal Reserve (Fed) chair Powell’s takeaway from the recent data at his press conference, but I doubt if he could have anticipated how good an economy this may be following Friday’s blowout jobs numbers. Overall, Nonfarm payrolls added a whopping 353k jobs at the start of the year - far surpassing expectations (the Bloomberg consensus forecast was 185k). This was the strongest monthly increase since last January's 482k gain. The upward revisions to December’s numbers were also notable. If the revisions accurately depict activity on the ground, hiring momentum was stronger than we realised at the end of last year. For the USD, this is a clear positive and Powell’s pushback on market pricing of early rate cuts could further aid the dollar’s upwards momentum.


At the start of the year, I felt market pricing for a 25 basis point rate cut by March was far too ambitious, and recent market pricing has validated my view. As Powell noted in his CBS interview “Nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts.”  


NatWest Economists continue to expect the Fed to deliver the first rate cut at the 1 May FOMC (Federal Open Market Committee) meeting. I see scope for further EUR/USD downside as the Fed pushes back against early interest rate cuts, the ECB (European Central Bank) starting to cut interest rates and the US economy remains comparatively strong. In my view, it’s possible to see EUR/USD slip towards 1.07 and then 1.05 from here.  This week’s ISM (Institute for Supply Management) data and CPI (Consumer Price Index) revisions will be key in determining the dollar direction.


A hawkish Bank of England vote split may give Sterling an edge over the EUR


The BoE (Bank of England) held the bank rate at 5.25%, with two members voting to increase the bank rate by 25 basis points, giving the hold a hawkish feel. In the press conference, the BoE appeared to push back on market pricing of more aggressive and earlier rate cuts in much the same way we have seen from the ECB and the Fed. However, to my mind the credibility of the messaging matters more for markets.


At 4%, inflation in the UK remains high and the latest labour market data showed a decline in the unemployment rate and labour force participation rate. The tightness in the labour market may place upward pressure in upcoming wage settlements, a risk to the BoE’s inflation target. This gives the BoE’s hawkish stance a strong degree of credibility against the ECB. Given GBP/EUR has tracked relative interest rate differentials, the policy divergence, in my view, may provide room for additional appreciation in GBP/EUR.

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