Global markets are in a state of heightened risk aversion as traders respond to the recent shock Non-Farm Payrolls data that indicated employers added 517,000 jobs to their payrolls in January. The strong labour market data sent the dollar to a nearly three-week high, putting other currencies on the defensive. The data was a surprise and suggested that the FED still has work to cool the market and inflation.
All major currency pairs are moving away from their post-September trends, with the data appearing too positive to be accurate, potentially due to seasonal adjustment issues. However, the underlying momentum in the American labour market remains much stronger than expected, supporting the expectations of monetary tightening. Market-implied rates suggest that the Federal Reserve will deliver at least two more quarter-point hikes before holding for an extended period – the market generally expected just one more quarter-point hike before a pause.
The British pound has experienced a 2.9% decline from last week’s highs, despite hawkish comments from Catherine Mann, a member of the Monetary Policy Committee. In a speech delivered in Budapest, Mann acknowledged moderating price pressures in the US and Europe but maintained that inflation remains a threat in the UK, emphasizing the consequences of under-tightening. She also added that a tighten-stop-tighten-loosen policy looks too much like fine-tuning.
The Euro has been affected by the recent decisions made by the European Central Bank (ECB). After the first estimate of the Eurozone Consumer Price Index (CPI) was released, which showed 8.5% inflation and 5.2% core inflation, above expectations, the ECB decided to hike interest rates by 0.5%. They also signalled that they would raise rates by another 0.5% in their next meeting in March. This showed the ECB’s commitment to their stance on inflation, as their President Christine Lagarde stated that they would “stay the course” on inflation, hinting at the possibility of further rate hikes. ECB member Wunsch added that a 3.5% terminal rate would be the minimum if core inflation remains persistent. Despite the recent negative outlook for the euro, the EURUSD still briefly managed to trade at 1.1000, a psychologically significant level but saw a slip at the end of the week.