How soft is too soft for the labour market?

In a busier week than expected, it was still hard to look past the dollar. Policy decisions from the BoJ, Fed, BoE, and BCB, combined with a whole raft of data releases had offered up plenty to keep traders on their toes even before geopolitical risks entered the equation. Granted, the BoE did take centre stage briefly with a rate cut that weighed on sterling. But the risk of escalating conflict in the Middle East, set against signs of a US labour market slowdown and a Fed insistent that policy rates need to stay on hold, proved a volatile mix. The first of these produced some decent dollar upside in the early part of the week. The latter saw the dollar tank on Friday, as July’s jobs report saw NFPs undershoot expectations by some distance, and the Sahm rule triggered. Despite the recession signal, however, markets sold the dollar on accelerated Fed easing bets, keeping the idea of a soft landing alive in principle,for now. We doubt this is a durable dynamic though if the labour market softens further – any US recession would still have spillover impacts on global growth that should see the greenback’s haven characteristics come to the fore. Next week, the data calendar dries up, with few top-tier data releases of note, and central bank speakers also noticeably absent. That said, on the monetary policy front, the RBA and Banxico are due to deliver rate decisions. Meanwhile, LatAm inflation data and a Canadian jobs report should offer at least something for traders to keep an eye on over their summer holidays.

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Authors: 

Nick Rees, FX Market Analyst

María Marcos, FX Market Analyst

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