NFP To Encourage Tightening, Keep USD Strong

Nonfarm Payrolls relatively disappointed prior estimates, but the labor market indicators were stronger than expected. The employment data has had a modest impact on the forex market. In the light of the NFP data, the US Fed is very determined to move out of easing policy settings.

The disappointment in payrolls will not undermine the USD. The Fed is on a mission to move into restrictive policy; taper is almost over, lift-off is happening, inflation is very high with evidence of second round price pressures. Despite the back-up in yields this week, financial conditions remain accommodative especially relative to the growth and inflation backdrop.

Economists do not rely much on Omicron news to sway sentiment in risk or forex, and consequently, Fed’s determination keep the USD in strong form.

The USD/JPY is the best expression of Fed policy, given it is just a mirror image of the Fed funds futures. Market observers remain biased to USD/JPY topside with an eye to 118/19 in the coming weeks and months, as further acknowledgement of QT should reinforce duration supply and higher 10 year real yields.