Dollar Edges Higher on Hawkish Fed Comments; Labor Data Eyed

© Reuters.

By Peter Nurse

AiVIF.com -- The dollar edged higher in early European trading Thursday, after hawkish comments from the Federal Reserve prompted traders to price in an earlier tightening of monetary policy.

At 1:55 AM ET (0555 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 92.302, pulling away from the one month low of 91.775 seen last week.

USD/JPY rose 0.2% to 109.66, EUR/USD traded 0.1% higher at 1.1839, and the risk-sensitive AUD/USD rose 0.2% to 0.7397, boosted by Australian trade data released earlier in the day which saw exports rising 4% month-on-month in June.

The dollar has been in a state of flux over the last couple of months, first rising after the June meeting of the Federal Reserve saw several members bring forward their timetable for interest rate hikes before slipping back after Chairman Jerome Powell stated last week that interest rate increases were still in the distance.

The currency took another turn after Fed Vice Chair Richard Clarida, usually seen as something of a dove, said Wednesday that conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023. Alongside three of his colleagues, Clarida also hinted that asset tapering could begin later in 2021 or early 2022.

Muddying the waters were mixed economic data Wednesday, with a surprisingly weak ADP report on private employment contrasting with the strongest ever reading for the U.S. ISM non-manufacturing PMI.

Still, it’s the labor market that traders are focusing on, with Fed members making it clear that improvement is needed there before any moves.

Thursday sees the release of the weekly initial jobless claims data, at 8:30 AM ET (1230 GMT), with analysts looking for a figure of 384,000, a gradual improvement from the previous week.

However, it’s Friday’s nonfarm payrolls release which is attracting the most attention. The median forecast is for 870,000 jobs, but there is a broad range of estimates given the potential impact of the spread of the delta Covid-19 variant on the labor market.

“The outcome will have a significant impact on how the U.S. dollar trades for the next few weeks leading into the Federal Reserve’s Jackson Hole summit,” said Kathy Lien, an analyst at BK Asset Management. “If the data is good, the U.S. dollar will soar on the prospect of a taper announcement later this month. However, if payrolls disappoints, the U.S. dollar will slide as investors push their expectations for taper to September or later.”

Elsewhere, GBP/USD rose 0.1% to 1.3893 ahead of the latest policy-setting meeting of the Bank of England later Thursday. The central bank could move a step closer to tightening monetary policy while raising its growth and inflation forecasts. 

“We believe that the BoE will grow more optimistic and less dovish, but policy-makers as a group will be divided on immediate tapering. At least one – and likely two – policy-makers will vote for tightening. If there are more than two, we could see a sharply positive reaction in sterling,” Lien added.

USD/BRL rose marginally to 5.1700 the day after Brazil’s central bank lifted its benchmark Selic interest rate by a full percentage point to 5.25% in order to fight heightened inflation levels.