Currencies: Dollar Sees Choppy Trade After Payrolls Data

The U.S. dollar saw choppy trading after the release of November nonfarm payrolls, which beat consensus estimates, while average hourly wage data disappointed.

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.16%  was last up 0.1% at 93.889. The index, which measures the buck against a basket of six other currencies, saw volatile trade but remained in positive territory. For the week, the dollar is looking at a 1.1% gain, making it its second gain in a row.

The broader WSJ U.S. Dollar Index BUXX, +0.12%  was up 0.1% at 87.31, rising 0.9% week-on-week.

Read: Here’s what’s threatening the dollar in 2018

The British pound GBPUSD, -0.6753%  fell to $1.3395 on Friday, from $1.3475 late Thursday, but rallied against the euro EURGBP, +0.6180%  following a breakthrough in Brexit negotiations. The euro-sterling cross fell to an intraday low of £0.8690, marking a six-month low, before recovering to £0.8787. On the week, the pound slipped 0.6% against the dollar and rose 0.4% against the euro.

Against the dollar, the euro EURUSD, +0.0000%  slipped to $1.1769 from $1.1774 Thursday, and dipped 1% on the week.

The dollar-Japanese yen pair USDJPY, +0.34%  was up at ¥113.48, off session highs at ¥113.56, but higher than ¥113.08 late Thursday. Since last Friday, the pair added 1.1%.

Also read: The Game of Krones: Inside Denmark’s battle to defend its 35-year-old currency peg

What is driving the market?

Even though nonfarm payroll data beat consensus estimates, another part of the report—average hourly wages—came in slightly weaker than expected, sending a conflicting message to dollar traders and making for whipsaw trading action.

Investors are now focusing on next week’s Federal Reserve meeting, where the central bank is expected to raise interest rates in perhaps the most anticipated central bank move of the year, as it has been priced in at near 100% for weeks.

In Europe, Jean-Claude Juncker, president of the European Commission, announced a breakthrough in Brexit talks.

In a news conference, he said that “sufficient progress” has now been made for the talks to move into the second phase, which will cover trade agreements and a potential transition period. EU leaders will consider whether to give a green light to advancing to the next stage when they meet Dec. 14-15 in Brussels.

U.K. Prime Minister Theresa May needed to resolve one last issue—the Irish border—to satisfy the Brussels negotiators. The question of whether to have a “hard” or “soft” border between Northern Ireland and the Republic of Ireland had already scuttled a potential deal on Monday.

But as the hard part of the talks it still to come next year, the sterling-dollar pair might have a hard cap to its upside at $1.36, suggested Viraj Patel, strategist at ING.

What are strategists saying?

“While the numbers were better than expected, hourly earnings indicate that while new jobs are being created, they are at the lower end of the income spectrum,” said Lennon Sweeting, head of corporate trading and chief market strategist at XE.com, in emailed comments. “As support for the dollar has been scarce, there is a significant risk for a downside swing if the FOMC fails to give the market what it wants, a clear trajectory for rates in 2018.”

“I think expectations may have been a little high going in,” said Brad Bechtel, managing director in FX at Jefferies, regarding the jobs report, agreeing that average hourly wage numbers disappointed. “But overall it was a good report, and the spending bill passed yesterday. Plus there is year-end demand for the dollar, which is just a seasonal occurrence.”

The House of Representatives and Senate passed a spending bill to avoid a government shutdown late Thursday.

“The Fed will hike next week, but the real question is what will happen to the dots now,” said Luke Bartholomew, investment strategist at Aberdeen Standard Investments, adding that it came down to how much tax reform is factored into the Fed officials’ models and how much the low wage number bothered them.

“The political significance of progress in Brexit talks is quite profound—not least as it reduces the tail risk of a ‘no deal’ scenario and a complete breakdown in negotiations,” said Patel.

What are the data?

Nonfarm payrolls for November came in at 228,000, beating the MarketWatch consensus forecast of 200,000, but falling from the previous month’s number of 244,000.

The U.S. unemployment rate was unchanged at 4.1%, in line with expectations, while average hourly wages rose 0.2% to $26.55, slightly below estimates.

In other data, December consumer sentiment slipped to a three-month low of 96.8, compared with the MarketWatch consensus forecast of 99, while wholesale inventories fell 0.5% in October, compared with a 0.3% increase in the month prior.

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