Quantitative Easing

Hawkish Fed has markets eyeing NFPs, RBA, ECB and BoE

US Dollar Fundamental Forecast: Bullish

  • US dollar continues to appreciate on risk aversion and Fed rate hike estimates
  • This week’s focus is on US nonfarm payrolls, which includes wage data
  • The RBA, ECB and BoE could offer hawkish tilts, will this induce risk aversion?

The US dollar soared last week, catapulted by a hawkish Federal Reserve monetary policy announcement. Chairman Jerome Powell opened the door to a rate hike and an end to quantitative easing in March. He also hasn’t been shy about leaving the door open to hiking at all costs this year if conditions warrant it. In the chart below, a majors-based US dollar index, which averages the USD against the EUR, JPY, GBP and AUD, closely tracks bullish bets. Fed rate hikes in December 2022. Four hikes are expected this year, with markets slowly pricing in a fifth.

Bets on US dollar rate hike vs Fed

US Dollar Outlook: Hawkish Fed has markets eyeing NFPs, RBA, ECB and BoE

Chart created in TradingView

The US dollar enters the new week in a rather strong state. Besides the boost from the Fed, rising volatility in global markets is playing another role in boosting demand for safe-haven assets. The greenback, which is the most liquid currency in the world, tends to be a benefactor of choice when market jitters kick in. Are there enough fundamental tailwinds to keep the US dollar on the offensive?

All eyes are on the non-farm payrolls report. The country is expected to add around 180,000 jobs in January, up from around 200,000 in December. More attention could be paid to average hourly earnings, which are expected to come in at 5.2% year-on-year, down from 4.7% previously. Looking at the next chart below, one could say that the labor market is tight.

As the unemployment rate has fallen toward pre-pandemic levels, the labor force participation rate has remained stubbornly low from pre-pandemic points. Job openings are plentiful and mentions of a shortage of skilled labor are all too familiar. This type of environment can be beneficial for wages, where a limited number of workers leaves companies competing for the few remaining talents.

This could open the door to inflation becomes “unhinged”, opening the door to sticky prices and, therefore, a hawkish Fed. Meanwhile, earnings reports from Alphabet (Google), Amazon and Meta Platforms (Facebook) will be closely watched after mixed reactions to reports from Netflix, Microsoft and Apple. With that in mind, a strong earnings reading can increase market volatility, boosting the US Dollar.

However, it should be noted that rate decisions from the RBA, ECB and BoE are pending. If these central banks also come up with increasingly hawkish changes, they could boost the Australian dollar, euro and British pound respectively. Despite everything, the prospect of tighter monetary conditions on a global scale could amplify market volatility. Overall, this may keep demand in the greenback.

US labor market data

US Dollar Outlook: Hawkish Fed has markets eyeing NFPs, RBA, ECB and BoE

Chart created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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