How has US dollar reacted to NFP data?

The Dollar Index is currently trading just above 102.00, showing a downtick of 0.30% due to the markets adjusting dovish bets post the release of December’s Nonfarm Payrolls (NFP) and the ISM PMIs.

Earlier on Friday, the dollar experienced a strong reaction to the recent NFP report in the United States, with the Dollar Index up 0.55% at 103.00. Nonfarm payrolls in the US rose by 216,000 in December, much higher than the market expectation of 170,000.

The Unemployment Rate remained unchanged at 3.7%, and annual wage inflation climbed to 4.1% from 3.9% in November. The change in total nonfarm payroll employment for October and November was revised down by 45,000 and 26,000, respectively, resulting in employment in October and November being 71,000 lower than previously reported.

The US gained 216,000 jobs in December 2023, beating estimates, and wage growth accelerated to 4.1%, posing a problem for the Fed. The robust data lowers the chances of an early rate cut, and cooling wage growth may cause a rethink in markets once the early 2024 correction subsides. Equity investors desire lower interest rates and worse data, but there is nothing in this report for them.

Labourers celebrated the surprising increase in Average Hourly Earnings and acceleration of yearly wage increases from 4% to 4.1%, smashing estimates of a slide to 3.9%. What is good for workers is positive for the US dollar, but not for stock bulls or the Fed, which may hold back cutting rates.

Investors had a rethink about the path of interest rates, with the Fed signaling three rate cuts in 2024 and bond markets getting overexcited, pricing five moves, with the first coming in March. The new year kicked off with a reveal of the late 2023 trend, with shares coming under pressure on every trading day of 2024.

Wage growth is booming, frustrating the Fed in its last battles against inflation. Once the dust settles from the current correction in markets, the narrative of rapidly falling inflation will gain more ground, supporting stocks and weighing on the US Dollar Index. However, it will take a weak inflation report to weigh on the Greenback, and this NFP for December does not provide any proof of falling inflation.