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Dollar falls, gold bounces after jobs beat – focus shifts to pace of Fed hikes

The US jobs report for February came in substantially better than expected on Friday, although a high reading had already been anticipated by the markets given Wednesday’s exceptionally positive ADP private employment data. The US Labor Department reported on Friday that 235,000 jobs were added in February against prior (post-ADP) expectations of around 200,000. Furthermore, January’s number was revised up from an already-high 227,000 to 238,000. The unemployment rate came in at 4.7%, in-line with expectations and slightly below the previous month. Average hourly earnings grew by 0.2%, lower than the 0.3% expected but better than January’s increase.

Although the jobs report painted a strong picture of the US employment situation during the Trump Administration’s first full month in office, the immediate market reaction for the US dollar and gold suggested that the good news had already been priced-in for now. In the aftermath of the jobs report, as US equities rallied before the market open, the dollar fell sharply while gold rebounded. These moves can be largely attributed to the lofty expectations for employment and interest rates that have already been established in the markets in recent weeks.

As Wednesday’s ADP number exceeded expectations even more than today’s non-farm payrolls, and the Fed Fund futures markets had continued to price-in the likelihood of a March Fed rate hike above 90%, the dollar had already been boosted while gold had already sold-off sharply. Since the near-inevitability of a rate hike next week had already been well-entrenched in these markets, it will likely take more than just additional positive economic data to extend the dollar’s rise and gold’s fall.

What these markets are looking for next may potentially be found next week when the Fed meets and then issues its monetary policy statement and holds its press conference on Wednesday. Assuming that the first rate hike of 2017 will indeed be announced at that time, markets will turn attention to any hints or indications of a possibly accelerated pace of rate hikes going forward. The last time the Fed increased interest rates, in December of last year, the outlook had risen to three rate hikes in 2017. If a March hike occurs as expected next week, this outlook could rise even more.

Therefore, despite the dollar’s drop and gold’s boost in the immediate aftermath of today’s positive jobs report, any indication next week of an accelerated pace of monetary tightening may likely extend the dollar’s recent strength and gold’s recent weakness.

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