Today’s nonfarm payrolls report is set to influence market expectations for the Fed’s January meeting. With New York Fed President Williams expecting slower hiring and heightened downside risks to employment, markets anticipate further rate cuts, likely extending the US Dollar’s (USD) weakening trend unless job growth surprises to the upside, MUFG's FX analyst Derek Halpenny reports.

Fed signals caution ahead of January

"Today’s nonfarm payrolls report could materially alter current market expectations for the Fed to leave rates on hold at the next FOMC meeting in January. The Fed will also be able to see the nonfarm payrolls report for December at the start of next year before deciding whether to leave rates on hold in January. The Fed may attach more weight to the December NFP report given it should be less impacted by the recent US government shutdown than today’s report."  

"New York Fed President Williams stated yesterday that it is too early to say about the January policy decision, and he expects today’s jobs report to show relatively slow hiring consistent with a gradual cooling of the labour market. He also believes that downside employment risks have risen in recent months while judging that labour demand has slowed more than supply. On the other side of the Fed’s dual mandate, he expressed optimism over the inflation outlook."

"Overall, his comments support our view that the Fed will deliver multiple further rate cuts next year helping to weaken the US dollar. The US dollar weakening trend is likely to extend into year-end unless today’s nonfarm payrolls report surprisingly reveals much stronger labour market conditions."