Hawkish Fed Has Markets Eyeing NFPs, RBA, ECB and BoE

US Dollar Fundamental Forecast: Bullish

US Dollar continued gaining on risk aversion and Fed rate hike estimates
Focus this week shifts to US non-farm payrolls, which includes wage data
RBA, ECB and BoE could offer hawkish tilts, will this induce risk aversion?

The US Dollar roared higher this past week, catapulted by a hawkish Federal Reserve monetary policy announcement. Chair Jerome Powell opened the door to raising rates and ending quantitative easing in March. He was also not shy about leaving the door open to hiking at every rate decision this year if conditions warrant. On the chart below, a majors-based US Dollar index, which averages USD against EUR, JPY, GBP and AUD, can be seen closely tracking December 2022 Fed rate hike bets. Four increases are expected this year, with markets slowly pricing in a fifth.

US Dollar Versus Fed Rate Hike Bets

Chart Created in TradingView

The US Dollar heads into the new week in a rather strong state. In addition to the boost from the Fed, rising global market volatility is playing another role in boosting demand for haven assets. The Greenback, which is the world’s most liquid currency, tends to be a prime benefactor when market jitters permeate. Is there enough fundamental tailwinds to keep the US Dollar on the offensive?

All eyes are on the non-farm payrolls report. The nation is expected to add about 180k positions in January, down from roughly 200k in December. More focus may be given on average hourly earnings, which are anticipated at 5.2% y/y from 4.7% prior. Looking at the next chart below, it could be argued that the labor market is tight.

As the unemployment rate has been falling towards pre-pandemic levels, the labor force participation rate has remained stubbornly low compared to pre-pandemic points. Job openings are plentiful, and mentions of a lack of skilled labor are all too familiar. This kind of environment can be beneficial for wages, where a limited amount of workers leaves companies fighting over the remaining few talent.

This could open the door to inflation becoming “de-anchored”, opening the door to sticky prices, and consequentially a hawkish Fed. Meanwhile, earnings reports from Alphabet (Google), Amazon and Meta Platforms (Facebook) will be closely watched after mixed reactions to Netflix, Microsoft and Apple reports. With that in mind, a solid earnings reading may increase market volatility, boosting the US Dollar.

However, it should be noted that the RBA, ECB and BoE rate decisions are on tap ahead. If these central banks also offer increasingly hawkish shifts, they could boost the Australian Dollar, Euro and British Pound respectively. Even so, prospects of tighter monetary conditions globally risk amplifying market volatility. On balance, this may keep demand flowing into the Greenback.