January 13, 2025

“A huge US jobs number handed the dollar its next leg higher on Friday as the unrelenting stream of strong economic data continues to pare back expectations for rate cuts from the Federal Reserve this year. The pound is still suffering the most from the global rise in yields, even as the UK government tries to reassure markets of their discipline.”

Tim Hallinan – Trading Director

USD

A blistering non-farm payrolls report has guided the dollar to a fresh two-year high as the market has begun to wonder whether the Fed is going to cut at all in 2025. Adding to the strong run of data in recent months, the US labour market smashed through expectations in December, adding 90K more jobs than expected, while unemployment surprised with a turn lower to 4.1%. Treasury yields rose nearly 10bps and the swaps market slashed bets on rate cuts this year to the point where barely one is priced in for the entirety of 2025. Some in the market have already to make calls on the Fed having already concluded its cutting cycle, owing to continued strong growth, the stabilisation in the labour market, Trump’s tariffs, and the stalling progress on inflation. Tuesday’s PPI and Wednesday’s CPI inflation data are expected to strongly support this notion and keep the dollar firm, with the consensus looking for a 2.9% headline CPI print and an unchanged 3.3% core measure.

GBP

Sterling has weakened to another 14-month low this morning as the global rise in yields continues to place pressure on the UK’s fiscal calculus and investor sentiment. Reeves’ assurances over the weekend that the government’s fiscal rules are ‘non-negotiable’ did little to stabilise the pound, and while a strong US payrolls report meant that the biggest drop was against the dollar, sterling has continued to grind lower on the crosses, too. The data this week puts it at risk of further losses if CPI inflation, GDP, and retail sales hint towards a quicker Bank of England cutting cycle than what the 43bps in easing this year that the market is currently pricing. The two measures that the BoE is primarily concerned with these days – core CPI and services CPI – are both expected to inch lower and support a third rate cut on the 6^th February.

EUR

The US payrolls report was the next catalyst to fuel EUR/USD’s creep towards parity. It is now hovering around the 1.02 handle as the US-Eurozone macroeconomic outlooks diverge further, with the market pricing in more than three times as much easing from the ECB versus the Federal Reserve. Some dovish ECB commentary this morning has reaffirmed this notion, with Chief Economist Philip Lane keeping to the expectation that further cuts are needed to stabilise the economy, and Vujcic arguing that market bets for rate cuts in the January and March meetings are reasonable.

Markets

The stock market reaction to the US jobs report was a familiar ‘good news is bad news’ approach, as the rise in Treasury yields and Fed rate expectations ultimately outweighed the boost to the economic outlook. The S&P 500 and the Nasdaq both dropped more than 1.5% and the Eurostoxx 50 shed 0.8%.

Main Economic Events (All Times CET)

5:00pm: US 1Y Inflation Expectations

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