The US non-farm payrolls release for October showed a notable cooling in labour demand, albeit it was affected by strike action from autoworkers. However, that did not explain the 100,000+ downward revision to the previous months' payrolls growth, nor the rise in the unemployment rate, cooling of average earnings growth and drop in the labour force participation rate. 

The US labour market has finally shown the effects of the hikes in interest rates from the Federal Reserve, and average earnings growth has been negative for the past three months in real terms on a month on month basis. So the sell-off in the USD, triggered by a sharp reduction in US bond yields, was not unexpected. However, the weakness in the US dollar has to be set against the context that the UK and Euroland economies aren’t performing well either. 

The latest UK labour market data pointed to weakness, and, coupled with the latest figures on retail sales, shows the economy is at risk of contraction into the end of the year. Equally, the latest Euroland labour market news recorded a rise in the unemployment rate, and the most recent PMI (Purchasing Managers’ Index) figures still point to contracting activity rates. Will the USD continue to lose ground to the likes of the GBP and EUR, or is this another example of the UK and Euroland economies not having the momentum to capitalise on the US’s recent troubles?

When looking at the GBP and EUR exchange rates versus the USD, the rebound seen recently appears inconsequential. In order for markets to get more optimistic about these currencies, a sustained break back above $1.26 and $1.0830 in GBPUSD and EURUSD respectively is required, in my opinion. Whilst both currencies are heading in the right direction, I see the recent moves as more of a reflex recovery having endured a prolonged period of weakness. 

Furthermore, this week is unlikely to see the likes of speakers from the Federal Reserve, including Chair Jerome Powell, or speakers from the European Central Bank or Bank of England offer any reason to suspect that official interest rates will move materially quicker than financial markets currently price in. 

So the USD has lost ground, but ultimately the US economy remains the best performing of the major economies, and I suspect the US Fed will remain reluctant to cut interest rates irrespective of the recent cooling in the labour market. We may have to wait until next week, post the October CPI (Consumer Price Index) and retail sales figures from the US, before markets can draw a firmer judgement on whether the US might be willing to bring forward the timing of the first interest rate cut, relative to the UK and Euroland authorities. 

This week’s central bank meetings include the Reserve Bank of Australia, the National Bank of Poland, Banxico (Mexican central bank), and the central bank of Peru. The RBA (Reserve Bank of Australia) is expected to hike interest rates to 4.35% from 4.1%, albeit the RBA was expected to hike last meeting and didn’t. This time though the quarterly CPI inflation outturn and the retail sales figures have probably tipped the scales in favour of a hike. 

The National Bank of Poland is expected to cut interest rates by 25 basis points, having learnt the lesson that a larger cut could be negatively received by the currency markets, and the Peruvian central bank is also expected to cut by 25 basis points. The only question is whether Banxico will cut interest rates as well? I think not on this occasion, but the central bank might signal that conditions are rapidly moving in favour of a cut, perhaps in the early part of 2024. 

Will the USD’s weakness be helpful in accelerating the timing of interest rate cuts? It depends on how much further the USD has to fall.