Written by Convera’s Market Insights team
Three points to remember for NFP
Boris Kovacevic – Global Macro Strategist
US markets did not add to global liquidity in yesterday’s session as they were closed to honor the passing of former president Jimmy Carter, but investors just could not resist buying the dollar before the all-important labor market report today. The Greenback was able to rise for a third consecutive day and is close to securing another positive week for itself. In absence of a downside surprise of the jobs figure, it would be the 14th out of the last 15 weeks that the US Dollar Index has risen.
Uncertainty about the future policy path of major central banks continues to plague investors. In the run up to the nonfarm payrolls report, Philadelphia Fed President Patrick Harper said that the exact timing of rate cuts will depend on the economy. This data dependency leaves investors zooming in on all macro releases to gauge where monetary policy is headed. Two of his colleagues added that a lower pace of policy easing is justified given the recent upside surprises in the inflation data. Market dynamics are reflecting that as options are currently pricing in only one rate cut for 2025 for now.
Only a big deviation from consensus might move the needle for the Fed when it comes to the NFP print today. Hiring likely slowed in December (165k) compared to the previous month (227k). With the unemployment rate expected to remain unchanged at 4.3% and the average hourly earnings seen cooling, this might become a jobs report underlining the status quo pricing of one rate cut for 2025. Three things to point out: 1. We see the potential for a slight upside surprise (190k) reflecting the recent uptick in leading indicators. 2. The December report will be the first one in Q4 to not be too heavily impacted by the Boeing strike and Hurricanes Helene and Milton. 3. November reports tend to be revised down on average. This could dampen optimism even in a case of a mild upside surprise in the headline December numbers.
Sterling hasn’t found a floor yet
George Vessey – FX Strategist
The first full week of 2025 is nearly over, and what a mess it’s been for UK assets. Gilts were dumped and yields thus surged to over decade highs, whilst the British pound dropped over 1% and to its lowest level in over a year versus the US dollar. The decoupling between GBP and yields has raised comparisons to the Truss budget chaos in 2022, but this time is different. It’s less about shock policy moves and more about mounting debt costs, limited fiscal headroom and a generally tougher global rates environment.
The Labour government will struggle to keep the deficit in check as borrowing costs surge. The chancellor’s £10bn fiscal headroom is probably all but gone, which could force some hard policy choices in the spring Budget. And although the UK still has lower debt than the US, France, Italy and Japan, persistent price pressures, and tepid economic growth are aggravating stagflation concerns and making life for the Bank of England (BoE) difficult. Though the gilt market has stabilised somewhat, helped by overnight index swaps pricing in 10bps more of easing by year-end, the pound still finds itself stuck under $1.23 and facing further downside risk if the options market is anything to go by. Demand to protect against further GBP weakness over the next month, quarter and year has surged, and investors now rank GBP as the most vulnerable G10 currency in H1 2025. Volatility expectations are also increasing. One-month implied volatility in EUR/GBP had its third strongest close since July 2023 while in cable, the gauge rose to its highest in nearly two years.
GBP/USD is also vulnerable to positioning and the incoming Trump agenda. On the former, GBP was the only long position held against the dollar by speculators at the start of the year, raising the risk of a sharp unwind and thus acceleration lower in the spot price. On the latter, yes, the UK is less exposed to tariff risks, but it’s not immune, and the pound is vulnerable via the risk sentiment channel too. Could we see $1.20 trade soon? It cannot be ruled out based on the above, but the pace of its decline this week suggests a pullback in the very short term is likely.
Rising yields behind euro’s fall
Boris Kovacevic – Global Macro Strategist
The euro continues to suffer from the global rise in bond yields despite a relatively healthy risk sentiment. The currency fell for another session against the dollar, making it likely five weekly losses in a row. If EUR/USD closes below the $1.03 mark today, it would be the first time since the end of 2021.
Data points like robust employment figures and persistent inflation have led to concerns that the US economy might be stronger than anticipated. This could lead the Federal Reserve to potentially raise interest rates again, putting upward pressure on bond yields. While inflation has cooled somewhat, it remains above the Fed’s target. This has raised concerns that inflation may be more persistent than initially hoped, leading investors to anticipate higher interest rates for longer. And thirdly, Donald Trumps expected budget expansion means that higher bond yields and term premia in the US are spilling over to other parts of the world. An overall tricky mix for the euro.
Domestic data points have painted a mixed picture of the Eurozone. German factory orders and retail sales surprised to the downside this week but export growth and industrial production beat expectations. In sum, the euro continues to be moved by external factors, but the domestic macro developments don’t raise confidence about the European growth outlook either.
Safe haven gold in high demand
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: January 6-10
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
