Non-Farm Payrolls Report Leaves Questions about Fed's Next Move

July 07, 2023: The foreign exchange (FX) market is still being determined about the implications of the recent non-farm payrolls report in the United States. While the headline figures indicated a soft result, the wage data showed more substantial numbers. This mixed information initially caused the US dollar to decrease in value, but it later rebounded. However, the dollar has now started to gradually decline once again.

When assessing the significance of this report for the Federal Reserve (Fed), the wage data holds greater importance. Despite an 88% probability of a July interest rate hike already being priced in, the focus of the debate has shifted toward a potential hike in November. However, since the November meeting is still far away, there is plenty of additional data to consider before making any decisions.

Instead of dwelling on the current report, market attention is shifting toward next Tuesday’s Consumer Price Index (CPI) report. The market is interested in whether inflation will fall below 3%. Economists’ consensus predicts a year-on-year inflation rate of 3.1%, down from May’s 4.0%.

The euro chart and the bond market reflect the struggle to accurately anticipate the Fed’s subsequent actions. The bond market, in particular, has seen 2-year yields decline by 6.2 basis points to 4.94%, while 10-year yields have increased by 1.5 basis points to 4.05%.

In the coming weeks, monitoring the USD/JPY chart is crucial as the Bank of Japan (BOJ) is scheduled to meet on July 28. The BOJ may introduce changes or provide signals related to yield curve control. Deputy BOJ Governor Uchida expressed caution today, stating that the risk of prematurely shifting policy and missing the chance to achieve 2% inflation is more significant than being late in tightening monetary policy. However, I can’t entirely agree with this assessment, and it seems that the market shares my viewpoint, as the yen is strengthening against other currencies.

In conclusion, the non-farm payrolls report has left the FX market uncertain about the Fed’s next move. While the wage data is considered more important, the focus has shifted toward the potential November hike. Attention now turns to the upcoming CPI report, and the market will closely analyze whether inflation falls below 3%. The euro chart and the bond market show the struggle to predict the Fed’s actions. Additionally, the BOJ meeting on July 28 has become a point of interest, with the possibility of changes to yield curve control. Overall, much anticipation and analysis is ahead to gauge the market’s future direction.