Solid US jobs report leaves a final Fed hike one step away

The increasing likelihood of a Fed rate hike in May 

• Solid payrolls report brings a May hike back on the table: The hike probability now stands at around 70%. 
• USD has eased back from gains: The rebound in the USD has unwound slightly on major forex today.
• Equities are mixed to positive: European indices are playing catch up on a late Wall Street rebound into the close, but US futures are only marginally higher.
• Metals and oil are higher: In commodities, gold and silver have rebounded, with oil also holding on to the recent gains.

A solid US jobs report 

The tightness in the US labour market has given the hawks on the FOMC cause to argue for one more hike.

Jobs growth of 236,000 beat the consensus of 230,000 whilst unemployment dipped to 3.5% and wage growth was in line with expectations, growing at +0.3% MoM.

Jobs continue to be created in the US, for now.

However, unemployment is a lagging indicator and weekly jobless claims are starting to rise.

Furthermore, year-on-year wage growth has fallen to +4.2% which was the lowest since June. This is a reflection of the reduced bargaining powers of employees.

These could likely be the final throws of the strong payrolls reports as the economic slowdown begins to bite.

Moving towards one final hike

For now, though, this payrolls report gives the hawks on the FOMC an excuse to hike one last time.

There are signs of the US banking crisis beginning to ease.

The Federal Home Loan Bank system issued a far lower $37bn in debt over the past week. This was down from $304bn two weeks ago.

Traders will now be looking towards the US CPI inflation data on Wednesday.

If CPI inflation does not fall as much as expected (headline CPI is forecast to drop to 5.2% from 6.0%) then it could trigger further calls for the Fed to hike.

Yields have rebounded

Despite this though, US yields jumped when bond markets re-opened on Monday.

The US 2-year yield has rebounded to around 4.00%.

This comes with US interest rate futures suggesting the probability of a Fed rate hike in May has increased to around 70% (according to CME Group FedWatch).

Interestingly though, markets are still positioned for rate cuts later in the year. 

Fed Funds Futures suggest that the “terminal rate” will be around 5.00% whilst there is expected to be a -25bps rate cut by Q4.

A USD rebound is threatening

Higher US bond yields have pulled the USD higher too.

Early on Tuesday morning, there has been a pullback in the USD (amid improved risk appetite).

This leaves the US Dollar Index intriguingly poised.

A rebound has threatened from the low at 101.41, and if inflation is higher than expected on Wednesday, the 103.05 resistance could be tested.

EUR/USD is still ranging 

EUR/USD

The recent pullback has found support at 1.0830 and rebounded this morning.

Technical analysis suggests that there is still a bullish bias towards a test of the medium-term range highs between 1.0970/1.1030.

However, the US CPI data tomorrow could be key.

For now, the technicals are positive:

• RSI momentum is positively configured, consistently above 50.
• The price is trading above rising moving averages.

However, the four-week rally is gradually losing impetus.

Reaction to 1.0830 support will be key as a move below 1.0788 would neutralise the outlook again.

Support and resistance levels for Forex, Commodities, and Futures/Indices 

Data: MT5/IXOne

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