Strong data from the U.S. labor market has shifted attention back to inflation, which is likely to rise due to the pro-inflationary economic policies planned by the Trump administration. This creates a compelling case for the Federal Reserve (Fed) to slow the pace of interest rate cuts.
In January, we will likely see a pause in reducing borrowing costs. However, it is possible that this cautious approach from the Fed may last longer, potentially for several months.
NFP Exceeds Expectations
The Non-Farm Payroll (NFP) report proved surprisingly strong. The creation of 256,000 new jobs and the decline in the unemployment rate to 4.1% are solid indicators that the labor market has stopped cooling. This result outperformed November’s data, which was already favorable due to the conclusion of strikes and the return of workers after hurricanes subsided. The decrease in unemployment is particularly striking given the increased participation in the labor market.
Pressure on the Fed Eases
The robust NFP data has alleviated pressure on the Fed to continue aggressively easing monetary policy. So far, the U.S. central bank has cut rates by a total of 100 basis points, and it appears likely that the current rate level will be maintained for some time.
The Dollar Regains Momentum
The dollar has gained strength once again. The EUR/USD pair broke below its January 2nd low and is now approaching 1.02. Itâs only a small step away from parity. Meanwhile, the NFP report failed to spark euphoria in the stock market. In fact, sentiment has worsened. Wall Street has had a rough start to the year, and the current pattern on the SP500 index chart suggests the risk of a deeper correction in the near future.
Inflation Data Gains Importance
In this context, next weekâs U.S. inflation data will be of particular significance. Additionally, we will learn the decision of Poland’s Monetary Policy Council (RPP) regarding interest rates, although no changes in monetary policy parameters are expected.
Author: Ćukasz Zembik, Oanda TMS Brokers
Source: ManagerPlus