NFPs should help halt the dollar slide

In the week just past, we saw the dollar slip back. Month-end flows, combined with a fading haven bid as tension eases in the Middle East, have helped take the wind out of the mighty greenback’s sails. That said, a light data calendar combined with the Thanksgiving holidays has also meant minimal domestic support for the dollar. Instead, traders’ attention has been left free to drift elsewhere, with the events in the eurozone and Japan catching our eye specifically. In the case of the former, we think central bank language has turned a little more dovish on net, while inflation undershot expectations, both of which should weigh in favour of a 50bp cut next month. Despite this, the market-implied odds of a jumbo rate cut remain sticky in the 15-20% range. This looks too low to us, posing a notable downside risk for the euro over the next fortnight. In Japan, by contrast, markets continue to ramp up BoJ hiking bets, with a 25bp rate increase next month now the base case for swap markets. The result has been a close to 3% appreciation of the yen versus the dollar this week, with JPY at the head of the G10 pack by some distance.

In the week ahead, there is good reason to think that Japan should continue to be a focus too. Wage data should be the final piece of the puzzle that allows the BoJ to hike rates later in the month. Meanwhile, CPI data in Sweden and Switzerland will also be of note. The former looks set to bounce after a series of weak prints. The latter will likely add to growing worries that Swiss price growth tips into outright deflation in 2025. The main focus of the week, however, is Friday’s jobs report. This is, in our judgment, the single most important data release left before year-end. We expect to see catch-up from October’s hurricane-impacted reading. If we are right, then this is likely to put the dollar back on the front foot heading towards the FOMC’s final rate decision of the year, set to be delivered on December 18th.

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Author: 

Nick Rees, Senior FX Market Analyst

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