The US Dollar aimed slightly lower this past week, with the DXY Dollar Index falling 0.7%. Broadly speaking, the best week for the S&P 500 since January (+1.9%) meant that sentiment was a key driver for financial markets. This dampened the demand for safe havens, such as the US Dollar. Traders might be getting ahead of themselves amidst this cheery mood.
Investors seemed to focus on comments from Atlanta Fed President Raphael Bostic. He said that the central bank could perhaps pause hiking rates this summer. Meanwhile, Richmond Fed President Thomas Barkin noted that he does not see that case for pausing hikes “at this moment”. Given these comments, it looks like markets are fixating more on the dovish side of things, which is not surprising.
Recent inflation data (including CPI and the Fed’s preferred PCE gauge) pointed to slowing disinflation. This was further confirmed by ISM prices paid data this past week, which unexpectedly surprised higher. In other words, the deceleration in inflation is slowing. That is not particularly something that the central bank wants to see, especially amid a still-tight labor market.
Speaking of that, all eyes will turn to the next non-farm payrolls report this week. The data is due to cross the wires on Friday at 13:30 GMT. The country is seen adding 215k jobs in February with the unemployment rate holding at 3.4%. Crucially, the labor force participation rate is seen stuck at 62.4%. This means that to this day, the active workforce has still not recovered to pre-pandemic levels.
The lack of labor supply has generally meant higher wages as firms competed over a relatively smaller share of potential workers. The Citi Economic Surprise Index tracking the US remains in positive territory and is sitting around the highest since April 2022. This means that economists have generally been underestimating data outcomes.
That is opening the door to an upward surprise in the jobs report. Such an outcome would likely pour cold water on hopes of pausing tightening this summer. On the chart below, markets are now pricing in about a 5.5% federal funds rate by year-end. That represents an extra 2 hikes compared to estimates at the end of January. As such, more dovish disappointment is opening the door to a stronger US Dollar.