Wall Street looks past the dollar dip towards the final of the Fed’s rate hike

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(Bloomberg) — Wall Street strategists are looking beyond a dip in the dollar following the latest U.S. jobs report, focusing on the likelihood that the Federal Reserve will still have to tighten monetary policy — albeit in a less frantic pace.

The Bloomberg Dollar Spot Index weakened Friday after a mixed reading of US employment data, which revealed both a strong labor market and declining wage increases in December. The greenback extended losses to 0.7% after a US services gauge unexpectedly shrank in late 2022.

Yet the US currency is still on track for its first weekly gain in three weeks. According to swaps traders, the Fed is now expected to hike rates to a peak of around 5% during this cycle, meaning there is still some room for hikes.

Investors will now turn their attention to next week’s inflationary pressures and a series of speaking engagements from Fed officials — including Chairman Jerome Powell — for clues on monetary policy stance.

Here’s what Wall Street strategists say:

Valentin Marinov, Head of G-10 FX Research and Strategy at Credit Agricole (OTC:) CIB

  • “The mix is ​​still positive enough for the Fed to maintain rate hikes.”
  • “That’s why I think any downside correction in the USD could be superficial, with investors using the USD dips to get ahead of Powell and CPI next week.”

Marc Chandler, chief market strategist at Bannockburn Global

  • Asset managers had built bullish positions on the greenback prior to the report with “stretched” short-term indicators indicating the currency was overbought.
  • “The economy is growing too fast and the labor market is too strong for inflation to fall back toward target in the kind of time frame the Fed wants to avoid being embedded in consumer and business expectations.”

Alejandro Cuadrado, Head of Global FX Strategy at BBVA (BME:)

  • “More important now is secondary inflation than the gradual slowdown in employment.”
  • “The dollar was strong in this first week of the year. The reading softens it a bit, but no bigger reasons for huge trend changes.

©2023 Bloomberg LP



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