NFP Quick Analysis: Dollar downing is far from over as wage growth may come to haunt it

  • The US reported 266,000 jobs gained, better than expected. 
  • Markets have sent the dollar higher, but the moves are limited. 
  • Fed doves have enough ammunition to signal the next move is cutting rates.

"Wow" was the response of some pundits on financial media when seeing impressive Non-Farm Payrolls report. The economy gained 266,000 positions in November, on top of upside revisions worth 41,000. That easily beat early estimates that stood at 180,000. 

Wage growth figures have been mixed, with monthly salaries up by 0.2% – weaker than expected – but yearly pay rises have accelerated to 3.1%. 

The dollar has been responding positively, with EUR/USD dropped to 1.1070. However, the greenback's gains have been limited – and probably for good reasons.

Dollar Santa rally? Not really

The jobs report feeds into the Federal Reserve's last decision of 2019 – due on Wednesday. While the Fed is set to leave interest rates unchanged and potentially signal several more hold, investors will try to estimate the next move. 

Jerome Powell, Chairman of the Federal Reserve, said that he sees the economy as "glass more than half full." However, then came downbeat ISM's Purchasing Managers' Indexes – which project further slowdown. 

And now, Non-Farm Payrolls figures  provide more ammunition for the hawks – in job growth. However, doves are unlikely to let go and keep on pushing for the Fed to slash borrowing rates once again, as inflation will likely remain subdued without a boost to pay. The hawks – some voting against the bank's three consecutive cuts – may be unable to make gains. 

Where does Powell stand? After the latest rate decision, the Fed Chair signaled a pause by saying that a "material reassessment of the outlook is needed for further rate reductions. But while a change in projections – significant as it may be – is needed for the Fed to cut rates, the bar for hiking them is much higher

Answering a question, Powell clarified that the Washington-based institution would only increase rates if inflation sustainably tops the target. The Fed would, therefore, wait for hard evidence that prices are rising before acting.

The November NFP – including mixed wage growth – is far from providing hints that consumer prices are on the verge of shooting higher. 

On this background, there are higher chances that the Fed leaves an open door to cuts while locking out any option of raising rates. 

And that may further weigh on the US Dollar, potentially reversing the post-NFP gains.

See Fed Preview: Is the bar higher for hiking? Powell's may down the dollar, three things to watch

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