The first Friday of the month indicates that the market will receive data on the situation in the American labor market. It is undoubtedly the most crucial point in today’s macro calendar. Forecasts suggest that we should receive further signals of a cooling down. Yesterday the dollar weakened and the EUR/USD rate significantly approached the level of 1.09. The Wall Street stock indices recorded a good session, which was the aftermath of, among other things, good results of technology companies such as Amazon and Meta Platforms. The Bank of England maintained the rate changes, but the statement and the later press conference by Chairman Bailey strengthened the GBP.
For a long time, the US labor market was “overheated.” Since the revival after the outbreak of the coronavirus pandemic, the demand for work clearly exceeded the supply. However, this gap has significantly narrowed. If this trend continues, wage growth should also slow down. Two years ago, hourly wages grew by nearly 6 percent. Currently, this dynamic is 4.1 percent. This factor is currently driving consumer inflation. The rule is quite simple: if the labor market weakens, the Fed will be able to cut interest rates faster. However, as pointed out by Powell, the economy does not have to slide into a deep recession for the Fed to loosen monetary conditions. Therefore, weaker data should now weaken the dollar. At the moment, the Fed’s rejection of the March cut only briefly strengthened the American currency. The exchange rate of the main currency pair returned to growth yesterday and reached its highest level since January 25th, breaking local maximums.
The job market slowdown was also highlighted yesterday in the ISM report. The employment data fell from a level of 47.5 to 47.1 points. The main indicator pointed to a further improvement of 49.1 points, although it is still a result below the crucial level of 50 points. The strength of the American economy was also underlined by the PMI for the industry, which increased to 50.7 points from 47.9 points.
The Bank of England decided on interest rates yesterday, which left its principal interest rate unchanged as expected. The statement after the meeting no longer indicated a need for further hikes. Although it paved the way for rate cuts, it also weakened expectations that the BoE might do so soon. In fact, the BoE emphasized that it needs more evidence that inflation will return to the inflation target of 2 percent in the longer term. The institution expressed particular concern about the persistently high inflation in services (6.4 percent in December), the continuous “tension” in the labor market, and the high wage growth. Although these indicators have recently improved, this is still not enough to be sure that inflation, especially core inflation, will continue to decline. Six people voted to maintain rates, two were for tightening further, while one proposed a cut.
As a result, the GBP appreciated. The “cable” rate (GBP/USD) significantly rose today, reaching 1,2760. Thereby, the upper limit of the potential “flag” formation was breached, which at least theoretically foreshadows the continuation of the prevailing upward trend. But remember that a large part of this movement resulted from the weakness of the US dollar.
-Lukasz Zembik, Oanda TMS Brokers
