Week Ahead in FX – After NFP Miss All Eyes on Janet Yellen

The U.S. added Less Jobs Than Expected in January, But a Rise in Wages Boosted the USD

The U.S. non farm payrolls (NFP) report published on Friday revealed a slowdown of the headline jobs number. The American economy added 151,000 jobs in January coming under the market’s forecast of 190,000. In December the economy posted a massive 292,000 (now revised downward to 252,000) and a lower number was anticipated. Hourly wages rose in January by 0.5 percent. The unemployment rate also dropped to 4.9 percent given the strong pace of job gains in 2015. The current unemployment rate in the U.S. is the lowest since November 2007.

The effect of the miss on the headline NFP number is muted given the impact on an already improbable rate hike by the U.S. Federal Reserve in March. Macro economic conditions have shifted radically from December when the Fed announced its historic first rate hike in a decade. The follow up to that policy decision will not come in March if U.S. fundamentals continue to slowdown.

The economic calendar for next week is lighter than usual as most major central banks skip February. The highlight will be U.S. Federal Reserve Chair Janet Yellen’s testimony as part of her semiannual Monetary Policy Report. Chair Yellen will face questions from the House Financial Services Committee on Wednesday, February 11 at 10:00 am EST and then from the Senate Banking Committee on Thursday, February 12 at 10:00 am EST. Investors will be on the lookout for comments on the next meeting of the Federal Open Market Committee (FOMC) on March 15 and 16.

Fed Chair Gets Chance to Add Clarity to Forecasts

U.S. Federal Reserve Chair Janet Yellen will testify twice during the week when she delivers the semiannual Monetary Policy Report to the House and Senate special committees. Each session will have the Fed Chief release a prepared statement and then take questions from Committee members. Given that there is no Federal Open Market Committee (FOMC) meeting in February this gives Yellen a chance to reassure the market about the Fed’s intentions regarding potential monetary policy decisions. The second rate hike to be announced at the end March FOMC meeting rose in probability after the stronger wage and unemployment rate, despite the lower than expected headline NFP.

The Fed forecasts 4 interest rates in 2016. The central bank opted to hold rates during the December meeting and fundamentals other than the jobs component have slowed down even more so between this week and the middle of March the U.S. economy would have to improve significantly for the Fed to hike again. It is too early for the Fed to cut its forecasts, but then again the street has already done so, with 2 to 3 rate hikes instead of the 4. Given the fact that this is an American presidential election year that could also limited the ability of the Fed to modify monetary policy during political sensitive periods leading up to the final vote.

U.S. Consumers Confident Yet Still Not Spending

The paradox of the U.S. consumer continues to confound economists. Wages and the number of jobs have risen to before crisis levels, and the confidence of consumers is high, but while their confidence remains high in the short term they have opted to save. The U.S. economy depends on consumer spending and the retail sales with few exceptions disappointed in the last two years. Most of the rallies that start at NFP came to a crash after dismal retail sales despite the warmer weather.

Energy savings due to the low price of gas has not translated into higher consumer spending and until that happens the retail sales number will remain low. Global uncertainty adds to local woes to drive consumers to watch their spending which prevents a virtuous cycle as the economy improves.

FX events to watch this week:

Wednesday, February 10
4:30am GBP Manufacturing Production m/m
10:00am USD Fed Chair Yellen Testifies
10:30am USD Crude Oil Inventories
Thursday, February 11
8:30am USD Unemployment Claims
10:00am USD Fed Chair Yellen Testifies
5:30pm AUD RBA Gov Stevens Speaks
Friday, February 12
2:00am EUR German Prelim GDP q/q
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment

*All times EST