Dollar Strengthens as Employment Data Boosts Prospects Of Further Rate Hikes

The US dollar rallied against its rivals on Friday as economic data reflected better-than-anticipated rise in the US non-farm payrolls, boosting prospects of further tightening of monetary policy by the Federal Reserve. The Labor Department’s data indicated that non-farm payroll employment rose by 390,000 jobs in May after jumping by an upwardly amended 436,000 jobs in April. The data has negated the feeble hopes that the central bank could temporarily slowdown its pace of interest rate increases.

Economists had anticipated employment to rise by roughly 325,000 jobs, compared with the 428,000 job additions reported for the earlier month. The Labor Department stated that the unemployment rate stood unaltered at 3.60%. The jobless rate was anticipated to inch down to 3.50%.

A unique report published by the Institute for Supply Management indicated that growth in the US service sector activity declined by slightly higher than anticipated in May. The ISM has stated that its services PMI declined 55.90 in May, from 57.10 in April. Economists had anticipated the index to inch down to 56.40. The services PMI decline to the lowest level since the release of a similar reading in February 2021.

The GBP/USD currency conversion rate bounced back from prior losses in mid-week trading session of last week but was hit again due to low volume holiday trade on Friday after the release of May non-farm payrolls and services PMI data provided a motive for the Fed to turn further hawkish in the days ahead. The pound’s decline on Wednesday below the 1.25 level was followed by a rebound as the greenback fell broadly in holiday thinned transaction volume on Thursday but the pound once again turned sluggish on Friday after the US economic data seemed to encourage the Fed to consider even quicker pace of rate hikes in the forthcoming months.

While the S&P Global Services PMI survey implied career opportunities, pay rise, and inflationary pressure could probably increase further in the future, the official indicators of salary growth in the United States slowed down a little in May along with the tempo of job opportunities. However, this may not have been adequate to transform much for the Federal Reserve, as it is possible that the decrease was not significant sufficiently. The S&P stated “May saw a continuation of historically strong levels of inflationary pressure. The pace of rise in cost obligations picked up speed once more to hit a fresh all-time high for this cycle. Participants on the committee noted that increases in gasoline, power, and supplier expenditures, in addition to wages, were the primary contributors to higher input expenses.”

The S&P Global PMI hardly recorded a change in May, even though it and few of the aforesaid info were refuted by the comparable Institute for Supply Management poll released a short while from then, falling by 1.20 points to 55.90. The industry body stated “The downturn in the industry was brought on by a decrease in company activity as well as a delay in supplier delivery services. Both the Employment Index (50.2 percent) and the Backlog of Orders Index rose, although at a moderate speed. The Employment Index is now considered to be in growth zone. The disruption caused by COVID-19 in the service industry remains, as does its impact on the conflict in Ukraine. Both the availability of labor and the cost of goods and services are continuing to be major concerns.”

Notably, both surveys indicated that job opportunities is on the rise, in addition to wage demand and other input costs, as these are matters that would ultimately fuel inflation and stimulate the Fed to carry on with the process of lifting interest rates in huge slabs for the rest of 2022. The greenback strengthened on the release of the aforesaid economic data, pushing the euro, pound and rest of the currencies lower following a Thursday rebound that had been supplemented by gains for riskier assets and an additional rebound by China’s strong Renminbi.

This has come after fiscal and monetary lawmakers in Beijing had hinted that monetary stimulus will be introduced in the economy, which is only second to the US. The report is perceived as a positive factor for trade based economies and currencies that are closely related with China. Furthermore, the Fed board members and regional reserve bank presidents have cleared the air by stating that they would support an interest rate hike to a level even higher than the ‘neutral rate’ in 2022.

In the meantime, Lael Brainard, Fed chatter Vice Chair, has pointed out that the prevailing market prices for benchmark interest rates is the minimum to be anticipated, while board associate Christopher Waller has turned out to be as much hawkish as Federal Reserve Bank of St Louis President James Bullard. Earlier, Federal Reserve Bank of St Louis President James Bullard had stated that inflationary pressure in the US will match levels recorded in the 1970s and cautioned that the US inflationary forecasts could turn out to be adrift without formidable Fed decision.

James Bullard’s worry is that without another rate hike, there could another season of high inflation and unprecedented economic scenarios. Bullar has highlighted that the Fed has lifted the benchmark rate, has guaranteed to lift the policy rate further in the months ahead, and has started the procedure of slashing the balance sheet that has ballooned to about $9 trillion during the pandemic. The issue is that Friday’s info only foments Bullard and rest of the members of the FOMC (Federal Open Market Committee) to lift the US cash rates to the top side or even higher above the oft cited ‘neutral rate’ before the end of this year. The neutral rate has been assessed to be about 2% to 3%, implying a need for further rate hikes and corresponding strengthening of the US dollar.