USD is trading on softer footing ahead of NFP report

USD: Will NFP report challenge market expectations for Fed rate cut pause?  

The US dollar has continued to trade on a weaker footing ahead of the release today of the delayed nonfarm payrolls data from November and October. The report will provide important information on the health of the US labour market in the run up to and during the record US government shutdown. Short-term US yields and the US dollar have been correcting lower following last week’s FOMC meeting at which the Fed left the door open to further rate cuts next year, although did signal that they are planning to leave rates on hold at the start of next year depending on the incoming economic data. Today’s nonfarm payrolls report could materially alter current market expectations for the Fed to leave rates on hold at the next FOMC meeting in January. The Fed will also be able to see the nonfarm payrolls report for December at the start of next year before deciding whether to leave rates on hold in January. The Fed may attach more weight to the December NFP report given it should be less impacted by the recent US government shutdown than today’s report.  

New York Fed President Williams stated yesterday that it is too early to say about the January policy decision, and he expects today’s jobs report to show relatively slow hiring consistent with a gradual cooling of the labour market. He also believes that downside employment risks have risen in recent months while judging that labour demand has slowed more than supply. On the other side of the Fed’s dual mandate, he expressed optimism over the inflation outlook. He stated the tariff impact on inflation has been “more muted and drawn out” than he expected. He doesn’t see any signs of spill-over effects from tariffs to other prices in the economy. “In particular, no broad-based supply-chain bottlenecks have emerged, shelter inflation has declined steadily, and measures of wage growth point to a continued gradual slowing”. He expects inflation to drop to just under 2.5% next year before falling back to the Fed’s 2.0% goal in 2027.

Overall, his comments support our view that the Fed will deliver multiple further rate cuts next year helping to weaken the US dollar (click here). The US dollar weakening trend is likely to extend into year-end unless today’s nonfarm payrolls report surprisingly reveals much stronger labour market conditions. After adding 119k jobs in September, employment growth is expected to drop back to around 50k in November. It compares to average monthly employment growth over the last six months to September of  59k. Fed Chair Powell did warn though at last week’s FOMC meeting that the Bureau of Labour Statistics may be overstating employment gains by around 60k per month largely due to the “birth-death” model, highlighting that labour market conditions are even weaker than they appear recently.

WILL US LABOUR DEMAND REMAIN WEAK HEADING INTO YEAR END?

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Loosening labour market conditions favour further BoE cuts

The pound has weakened alongside the US dollar at the start of this week resulting EUR/GBP rising back up closer to the 0.8800-level after hitting a low of 0.8721 on 9^th December. We expect the pound to weaken further as the BoE moves to lower rates this week. The relief rally for the pound after last month’s Budget appears to have run its course now. The recent softening of UK inflation, weaker growth and loosening of labour market conditions has provided justification for another BoE rate cut this week, and should be sufficient to encourage at least key swing voter Governor Bailey to shift in favour of a vote for another cut this week.

The release today of the latest UK labour market report provided further evidence of loosening labour market conditions. Payrolled employees fell by -38k in November. It was the largest monthly decline this year and takes the year to date drop to almost -154k. Loosening labour market conditions were also highlighted by the ongoing rise in the unemployment rate to a new cyclical high of 5.1%.  It has risen by 1.0 percentage point in just over a year. Loosening labour market conditions and softening inflation are helping to slow wage growth. Private sector wage growth excluding the more volatile bonus component slowed to 3.9% 3M/YoY in October down from 4.2% in September, although it was a little higher than the consensus forecast. It has been trending lower since the end of last year when it was at 6.2% in December 2024.

The last potential banana skin for BoE rate cut expectations will be the release tomorrow of the UK CPI report for November. A significant upside inflation surprise would be required to derail a  rate cut this week given slowing economic growth and loosening labour market conditions in the UK. Please see our latest BoE preview report (click here) for more details on this week’s MPC meeting.      

BOE RATE CUT EXPECTATIONS ENCOURAGED BY UK LABOUR MARKET

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com