US recap: Dollar firms after Friday’s NFP dive with CPI up next

Aug 7 (Reuters) – The dollar index was flat after Monday’s initial rebound from Friday’s jobs report induced slide as shorter-term Treasury yields slipped in case Thursday’s US inflation report reinforces expectations the Fed’s tightening cycle is over and rate cuts are likely in 2024.

As with so many US economic releases recently, Friday’s jobs report presented contradictory evidence regarding the state of the labor market, and thus the need for more Fed tightening that generally supports the dollar.

It’s clear the still historically tight labor market is becoming less so, but when it will go from cooler to cold, making Fed cuts far more likely, remains to be seen. That as the economy has so far outperformed expectations in the face of the biggest Fed rate hikes in four decades.

Also, perplexing markets is whether tight policy is needed, regardless of where the labor market is, if inflation continues to trend toward the target.

Fed’s Bowman and Williams put forward hawkish and dovish policy outlooks, respectively, on Monday. That divergence of opinions hints at the Fed leaning toward pausing until there is clear evidence more or less restrictive policy is needed. Whether Thursday’s CPI can break that tie is debatable.

EUR/USD fell 0.05%, unable to better Friday’s initial post-payrolls highs. Last week’s ECB assessment that underlying inflation in the region had likely already peaked came amid ongoing growth concerns exacerbated by Chinese economic anxiety. These risks may need to recede to make another ECB hike a higher probability.

USD/JPY rose 0.5% after the post-payrolls lows attracted buyers above 141.50. That as BoJ meeting minutes hopeful of rising wages was met with lower JGB yields, which remain very low compared to Treasuries.

Sterling gained 0.3% after a weak start, aided by 2-year gilts-Treasury yields spreads rising roughly 9bps and after last week’s price lows held important support following the BoE’s latest rate hike.

(Editing by Terence Gabriel; Randolph Donney is a Reuters market analyst. The views expressed are his own.)