Jobs data in focus with scope for dollar to extend modest gains

USD: Will jobs data reinforce positive dollar momentum?

The dollar is 0.7% stronger since the start of the year with what limited data we have had so far indicating stable, to improved economic conditions. The consensus for NFP today has crept up slightly and now stands at 70k, a modest uptick from the 64k increase in last month’s report. This implies roughly flat growth given the Fed’s view (expressed by Powell) that the NFP data is over-reporting jobs growth by about 60k per month. The jobs data so far this week certainly points to modest improvement in labour market conditions with the ADP showing a 41k increase while the ISM Services Employment index advanced to 52.0. The initial claims print also fell to 208k.

So the consensus of relatively stable labour market conditions, perhaps with the risk of some slight improvement, will only help to reinforce current market pricing on Fed action. The March meeting is now priced at a little less than a 50% probability for a 25bp cut and a full cut is not priced until June. This is a forward curve that is supportive for now for the dollar and the jobs data looks unlikely to instil any urgency for the Fed to bring forward rate cuts, especially given the pre-emptive nature of the cut in December that, based on the FOMC minutes, was agreed with many having reservations on its need. The government shutdown has ended and trade uncertainties have receded so the balance of risks have certainly shifted somewhat favouring some improvement in the flow of economic data.

For US dollar direction over the short-term, other drivers beyond Fed policy expectations will also be important. The imminent Supreme Court hearing (see below), the confirmation of President Trump’s Fed Chair pick and developments abroad, including geopolitical risks, are potentially as important. We continue to expect improvement in economic data in Germany and Japan to help curtail any sustained pick-up for the dollar. This week German factory order data was far stronger than expected. The defence and infrastructure spending program is set to kick in and drive stronger industrial production in H1. The annual increase in factory orders of 10.5% is the largest gain since 2011 (excluding the covid period). The majority of G10 OIS curves now indicate expected monetary tightening in 2026 which should curtail the scale of any dollar rebound over the short-term.

SUBDUED EMPLOYMENT GROWTH LIKELY TO BE CONFIRMED AGAIN IN TODAY’S NFP DATA – WITH PERHAPS SOME UPSIDE RISKS TO CONSENSUS

Source: Bloomberg, Macrobond & MUFG GMR

USD: Possible US Supreme Court ruling today

We know that today is marked as an “Opinion Day” at the Supreme Court which means we could certainly get a ruling on the legality of using IEEPA for the reciprocal tariffs regime that the Trump administration initially announced in April. It is not definite that the ruling will be today as it is not made clear whether this specific ruling will be made. But given the urgency and importance and this being the first opportunity of the new year there is a high chance it could well be today.

A federal appeals court has already upheld the initial ruling by the Court of International Trade that Trump illegally implemented the tariffs under IEEPA and the oral argument at the Supreme Court on 5^th November certainly gave the impression of the collective view being one of scepticism that the approach was legal.

There was also a degree of scepticism over the incentives. The Supreme Court was concerned over the White House implementing a tax revenue-raising policy that constitutionally is a function that only resides with Congress. The Trump legal team argued at the Supreme Court that the reciprocal tariff regime had nothing to do with raising taxes. That was the argument despite President Trump constantly mentioning the “trillions of dollars” being raised due to tariffs.

So the general consensus appears to lean toward the Supreme Court ruling against the Trump administration and endorsing the lower courts’ decisions. So our sense is that market participants won’t be hugely surprised. There is also an expectation that the Supreme Court may leave the issue of repayment of tariffs already paid by US importing companies to lower courts and individual companies to resolve.

What is also expected is that the Trump administration will have ‘Plan B’ ready to go although we doubt ‘Plan B’ (Section 122?) will be as all-encompassing as the reciprocal tariff regime and hence some reduction in expected revenues seems very likely to be priced by the markets. That could mean there is some yield curve steepening momentum but that will be dependent on Trump’s policy response.

The ruling against Trump is likely to see a renewed escalation on trade policy uncertainty which we would argue is US dollar negative although given a ruling against would be less surprising we may not see big market moves. But market participants will be awaiting Trump’s response with nervousness and we may see some renewed volatility (although nothing like April last year). Renewed uncertainty is bad for US companies and if the US curve was to steepen this would generally be consistent with the dollar weakening as well. Weaker inflation ahead would be a factor that could see front-end rates fall and would add to dollar selling. So whether initially or over the coming weeks – depending on the response from the Trump administration – we would view the scenario as renewing downside risks for the dollar. However, a quick less aggressive tariff response from the Trump administration, which would be a surprise to us, could be viewed positively from a US growth perspective that could offset any dollar negative momentum.

STEEPER UST CURVE TENDS TO COINCIDE WITH WEAKER US DOLLAR

Source: Bloomberg & MUFG Research; OIS rates as of 30th Sep and 31st Dec 2025

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com