US dollar, benefits, forex, trading, trade

Author: Sifu Steve Tee

Economic news release from previous week give some insights into the US economy and how its going to affect the US dollar. JOLTS job opening data shows that the job market is growing and hot. ADP non-farm employment info also suggest a linear sentiment as employment growth is positive. Despite the Federal Reserve consistently increasing interest rates (and recently slowing the rate increase amount), this give more conviction that Jerome Powell could potentially step on the pedal to continue raising rates to push inflation down.

Rolling back first to end the of December 2022, as many are developing a negative outlook about how much doom and gloom 2023 will bring, the data indicates otherwise. On 21st December 2022, CB Consumer Confidence data was release and the surveyed was better than forecasted. In other words, consumers are seemingly beginning to trust the recovery of USA’s economical strength once again. Unemployment claims also fell slightly and Core PCE Price Index shows unchanged.

Further evidence also can be found from Non-Farm Payroll report last Friday that could be the additional proposition for Jerome Powell to continue hiking rates. NFP data shows that unemployment rate is going down and non-farm employment growth is strong and resilient. Average hourly wages drop by 0.1%, which may seem slightly insignificant. Therefore, it seem to me that beginning of 2023 has so far proven to boost employment and job creation, likely from a direct result of businesses beginning to hire as economic activities starts to pick up.

This week’s economic news data could like be interesting to see if it provides more hawkishness for interest rate hikes. There is a Fed Chair speech on Tuesday and CPI numbers will be released on Thursday. CPI data will be critical as this information is what concerns Jerome Powell. It is forecasted that CPI will drop to 6.5% from previous 7.1%. At current US interest rate sitting at 4.5%, if CPI were to drop to or below forecast, then Jerome Powell will almost definitely raise another 50 basis point to reach its 5% target interest rate during the next FOMC release.

Many have talked and whispered about the Fed pivot and when will it come. Based on the economic data, a pivot does not seem plausible at all, at least for now. Even at 5% interest rates, inflation will still be at the high end of 6% – 6.5%. To be able to bring down inflation to 2%-3% as what Jerome initially wants to target, interest rate has only one way to go which is up, approximately 8% – 10% and this is a conservative estimate. Jerome Powell is not able to tame the job market by slowing down the rate hike amount as of now. It he wants to destroy demand to bring down inflation, he has to raise rates more aggressively. All the hard data seem to point towards more rate hikes and not a pivot. Rate hike meaning bullish USD in the future short term.