The Fed has room to wait
|- Strong jobs report allows the Fed to pause.
- The Yen believes in capital repatriation, while the Pound fears a double whammy.
The US economy is expanding not only because of artificial intelligence and the wealth-increasing rally in stock indices, but also thanks to increased life expectancy. Older people require care, and the surge in healthcare hiring contributed significantly to the 130K increase in employment in January. The chances of a Fed rate cut in April fell to 22%, and to 58% in June. And the EURUSD sank along with it.
The reduction in the unemployment rate to 4.3%, the number of Americans working part-time, and the number of people unemployed for more than six months complete the picture of labour market stabilisation. This is good news for the Federal Reserve, which has cut rates three times in 2025 to avoid putting undue pressure on the economy. The pause in the cycle of monetary expansion is likely to drag on, playing on the dollar’s side.
Meanwhile, Donald Trump is calling for cuts in borrowing costs to save trillions of dollars in debt servicing. The White House continues to push its line, but if the Fed's independence is not threatened, EUR/USD bears will remain in control.
The dollar's strengthening gives USD/JPY bulls a chance to find their footing. One of the factors behind the pair's rally to January highs was the carry trade. However, BCA Research recalls three cases, in 2008, 2015 and 2020, when the unwinding of carry trades due to deteriorating global risk appetite or strengthening funding currencies led to a fall in USD/JPY.
The yen is supported by confidence in the stabilisation of the financial system under Sanae Takaichi. This will accelerate the process of repatriating capital to Japan by residents of the country. Non-residents are attracted by the best start to the year for Asian indices this century. On the other hand, the spread between the Fed and BoJ rates remains wide, which helps USD/JPY buyers.
One of the main losers from strong US employment statistics was GBP/USD. According to Citigroup, the pound's decline will accelerate in the second quarter when it comes under the double blow of increased political risks and the Bank of England's monetary policy easing.
The positive news from the US labour market prevented gold from consolidating above $5,100 per ounce. However, its stability indicates that speculative demand remains strong.
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