Strong US labour market report highlights diverging monetary policies, sends Dollar soaring

Enrique Díaz-Álvarez09/Nov/2015Currency Updates

The key event of the past week, the labour report out of the US, provided some fireworks in the currency markets on Friday. The very strong report, considerably above expectations, vastly increases the chances of a Federal Reserve hike at the December FOMC meeting, in line with our forecasts.

Unsurprisingly, the US Dollar soared against every major world currency on Friday, with the conspicuous exception of the Brazilian Real, which was up over 2% for the week and seems to be in the process of unwinding some of its excessive sell off over recent weeks. Should the US hike interest rates in December, the Dollar is very likely to strengthen further against the majority of other currencies.

The divergence in monetary policies across the Atlantic was put in stark contrast, particularly as the labour report came on the heels of a surprisingly dovish Bank of England statement the day before and continued disappointments from German industrial data.

Given this change in narrative and difference in message from the US, a weaker than expected GBP could be on the cards over the medium term.

Major currencies in detail:


The November UK Monetary Policy Committee meeting brought us a dovish surprise.

We saw the same 8-1 vote to keep rates unchanged, but the accompanying statement and projections were very cautious. The Bank of England now expects inflation to remain below 1% until the second half of 2016 and sees downside risks to this outlook.

Importantly, the weak global economic backdrop is mentioned no fewer than four times in the statement. Sterling strength is also singled out as a persistent factor in dampening inflation pressures. This is significant as global developments are now a key factor on which the timing of UK interest rate increases will depend. Until now, the MPC mostly focused on domestic demand and the UK labor market.

No surprise that Sterling was sent sharply lower against both the Euro and the Dollar after the announcement, and it continued to fall against the latter on Friday after a strong US labor report number was released.

We are pushing back our expectations for a Bank of England interest rate hike into the third quarter of 2016, and consequently will revise our forecasts for Sterling modestly lower.


Any doubts that the ECB will increase monetary stimulus at its December meeting were dispelled by last week’s very weak industrial production data.

German numbers came in well below projected in September, as both industrial production and orders fell 1.3% and 1.7% respectively. This is particularly worrisome as the September data does not yet reflect any potential impact from the Volkswagen scandal.

Once again, a gap is opening up between the relatively upbeat business PMI surveys, which are still at levels consistent with 2% growth, and the more dismal real production data.

We do not think the ECB will wait for this dichotomy to resolve itself and therefore expect a sizable increase and extension of the monthly purchases of Government bonds at the December meeting. This should continue to put downward pressure on the Euro.


On Friday we were treated to a very strong US labor market report.

The US economy created a net 271,000 jobs in October, far above the 180,000 or so that had been expected. Unemployment dropped to 5.0%, right around the Fed’s estimate of full employment.

The wage numbers must be particularly welcome to Chair of the Federal Reserve Janet Yellen: hourly rates rose 0.4% for the month, and the annualised increase is back at 2.5%. The US job market is delivering both steady job creation and modest real wage increases.

As we have been saying for some time, the US economy is no longer in an emergency position and therefore emergency monetary policy settings are no longer warranted. The market’s’ expectation of a December interest rate hike jumped from 30% to 70% on the wake of Friday’s labour report. We think this should be higher still and, absent a global financial meltdown, we are now certain the Federal Reserve will hike interest rates in December.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.