NFP data doubled, rate hike expectations fuelled

USD bulls’ hopes for an interest rate increase before the end of the year increased sharply after above-expectations jobs data. According to the monthly Nonfarm Payrolls data report, released on the first Friday of each month by the U.S. Department of Labour, during October there were 271,000 positions filled in all sectors except the agricultural. The number of new employments has not only doubled in comparison to the previous month’s data, it was also a big surprise for the markets as analysts were expecting the number to increase significantly but only to be closer to 180,000. The encouraging data increased traders’ expectations that during the next Federal Open Market Committee (FOMC) meting in December, members could decide on a rate hike. Almost seven years ago the Federal Reserve (Fed) decided on a rate decrease to near-zero levels in an attempt to tackle the financial crisis back then.

The economic recovery that followed has been incremental and there were a lot of efforts by the Fed, including a Quantitate Easing programme that included several billions of dollars of asset purchases on a monthly basis. However, the continuous encouraging performance of the U.S. labour market might eventually persuade policymakers to decide for an interest rate increase during next month’s meeting. A separate household report, also released by the Department of Labour, revealed that the unemployment rate unexpectedly decreased to 5%, the lowest rate since the last interest rate trimming i.e. 2008. In addition to that, there were positive adjustments to the August and September NFP data by 12,000, and also an increase to the average hourly earnings by 2.5% compared to twelve months ago.

The Fed views the U.S. employment performance as a key factor for its decision on whether to proceed with a rate hike and the latest strong NFP result only added fuel to speculation that it could happen as early as December. On Wednesday, Fed Chairwoman Janet Yellen gave a speech during which she confirmed that there is a live possibility for an interest rate increase next month. A large number of analysts are not only increasingly confident that this will happen, but some have also began investigating the details of such a move by speculating that there could be a series of incremental increases over a period of time.

The U.S. dollar reacted with force to the better-than-expected NFP data as on Friday the EUR/USD decreased by 1.3% and ended the trading week at 1.07397. Janet Yellen’s speech on Wednesday also forced the currency pair to earlier losses while on a weekly basis it nosedived by 2.6%. On Friday the GBP/USD moved with sharp losses of 1% and ended the week’s trading session just above the 1.50 level. So even though there are widespread rumours of a December interest rate increase, it looks like the possibility has already been priced in to some extent.

Even though the U.S. employment sector remains high on the Fed’s list of parameters that will influence its decision on an interest rate increase, the continuing slowdown of global economic growth could work against it. The upcoming Chinese unemployment rate for October, expected on Tuesday 10 November at 06:45 GMT, will shed more light on the second largest economy’s performance and could be enough to inject the markets with volatility.

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