FX market remains skeptical following US labor market report
US labor market figures released on Friday were expected to confirm whether the labor market situation had indeed improved and paved the way for a rate hike in September.
The figure reveals 215k new jobs were created, the unemployment rate remained steady at 5.3% and wage growth was moderately stronger (by 0.2%) than in June. So the Fed's preconditions were met, and statements by Fed officials during the past week suggest that a lift-off in September is likely. The markets followed this reasoning and put the probability of a September rate hike at just above 50%, states Commerzbank.
The indication of rate hike cause the dollar to rise, but it depreciated after two hours. Investors used the appreciation of the dollar to its highest level since April to take profits. This is not a good sign for the Fed. It means that the FX markets at least are still skeptical and do not expect the Fed to hike its key rate as indicated in its June forecast. In other words: The markets have accepted one rate hike during the remainder of the year. They do not (yet) believe in a second rate step. And as long as they stick to that expectation, a significant rise in the dollar is likely to trigger profit taking, says Commerzbank.