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US interest rates possibly on the rise and stronger U.S. data

The only currency that did not end the week higher against was the euro and that was because of the ECB. The commodity currencies were hit particularly hard while the sterling crumbled under the weight of Brexit. The week ahead will be another busy one with four central bank rate decisions, Australia and the U.K.’s employment report and the possible trigger of Article 50 on the docket.

Investors took profits on their long U.S. dollar positions on the back of Friday’s non-farm payrolls report. Job growth was solid and the unemployment rate improved but average hourly earnings grew less than anticipated. With the U.S. dollar rising as much as it had ahead of the labor market report, this one minor miss was the excuse that traders were waiting for to unwind their positions. Overall, the labor data was solid with 235K jobs added in the month of February and the unemployment rate revised down to 4.7% from 4.8%. Payroll growth in January was also revised higher so while average hourly earnings growth did not accelerate as much as anticipated the 0.2% increase along with the 0.1% upgrade to January wage growth makes the overall report supportive of March tightening. Unfortunately it wasn’t good enough to extend the dollar’s gains into the weekend but we expect another leg higher in USD/JPY in the days before the FOMC rate decision. We should see 115 again and possibly even 116 if Janet Yellen suggests that the next rate hike will be sooner rather than later or June instead of September.

It is important to remember that at the end of the day, today’s non-farm payrolls report does not alter the Federal Reserve’s plans for this week’s monetary policy meeting. When Janet Yellen last spoke she made it very clear that as long as the economy progressed as expected, a March hike would be appropriate. Investors are on the same page with Fed fund futures pricing in 100% chance of a hike this week. Data has been relatively good with activity increasing in the service and manufacturing sectors, inflation on the rise, core spending growing, sentiment holding firm and housing market activity resilient despite higher mortgage rates. Stocks also climbed to fresh record highs over the past month thanks in part to President Trump’s infrastructure and security spending plans. If the Fed doesn’t raise interest rates in March, they risk falling behind and this remains true after Friday’s non-farm payrolls report. The pullback in the greenback was nothing more than profit taking and we expect renewed strength in the dollar versus the Japanese Yen and British pound. Aside from the FOMC rate decision, consumer spending, retail sales, housing and manufacturing reports are also due for release. The Bank of Japan has a rate decision as well but unlike the Federal Reserve, no changes are expected from the BoJ.

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