The US labour market is proving resilient, lifting the dollar and putting pressure on European currencies.
Investors looked to the dollar last week as stronger-than-expected jobs data suggested the US economy is proving resilient despite significant headwinds. Nonfarm payrolls rose by 172,000 in May, well above the forecast of 85,000. That benefitted the dollar, which hit a six-week high against the euro. Investors were also concerned by rising prices in the eurozone, as data showed inflation hitting 3.2% last month.
The pound was also hit by the strengthening dollar, falling to its lowest level since mid-May against the US currency. The euro dipped slightly against the pound, but remains up against sterling by over 2.5% over the past 12 months.
US rate hikes increasingly on the cards
One result of strong US jobs data is the growing belief among investors that the Federal Reserve (Fed) will hike interest rates at least once before the end of the year. This would be controversial, because President Trump favours cuts – and fast. Nevertheless, a resilient labour market coupled with inflationary pressures from the war in the Gulf could force new Fed Chairman Kevin Warsh to act, despite his dovish instincts. Could a row with the White House be brewing?
The situation in the EU and UK is entirely different, with markets seeing interest rate rises in both jurisdictions as almost certain. In fact, many investors now think the first EU rate rise of the cycle will arrive this week, with the European Central Bank’s (ECB) next policy decision expected this Thursday. Expect exchange rate fluctuations as a result.
The week ahead
With eurozone inflation at its highest in more than two years, the ECB’s next interest rate decision (Thursday) will be keenly anticipated. In the UK, retail sales (Monday) and GDP (Friday) will be in focus, while inflation figures in the US (Wednesday) will give an indication of how much the conflict in the Middle East and closure of the Strait of Hormuz is impacting prices.
