Fed to go ahead with June rate hike on upbeat jobless claims

Base Indicator: US Unemployment Claims, Impact: High
Currency: EUR/USD, USD/JPY
Actual: 283, Consensus: 293, Previous: 304
Next Release: 26 Feb, 2015

"FOMC to ultimately attach more weight to continued labour market improvement than the low level of inflation"- Danske Bank

US unemployment claims fell from 304k to 283k last week, suggesting that the labor market was gaining momentum. Analysts expected the reading to stand at 293k.

"The jobs market has its pedal to the metal. We have crossed the dividing line where there are more signs of labor shortages now than there is an excess supply of discouraged workers pounding the pavement," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

The economy has added more than a million jobs over the past three months. Economists now say that improvement in labor market conditions will ease the Federal Reserve's concerns over low inflation, and make way for the central bank to raise interest rates in June.

"Our long-held view is that the Fed will deliver the first 25bp rate hike in June this year. We still see a reasonable probability of a hike in June, but acknowledge that the low level of core inflation and disagreement within the FOMC could postpone it to later in the year", Signe Roed-Frederiksen, Senior Analyst at Danske Bank. "We believe that the decision will be data dependent. Here we expect the FOMC to ultimately attach more weight to continued labour market improvement than the low level of inflation."

In a separate report, the Philadelphia Federal Reserve Bank said its business activity index fell to 5.2, the lowest since February 2014, from a reading of 6.3 in January.

"A lot of the demand has been domestically sourced, so a lot of export-oriented industries are facing headwinds given a stronger dollar and weaker global growth backdrop," said Gennadiy Goldberg, an economist at TD Securities in New York."I would expect a pick-up given how quickly employment is growing and just how solid the U.S. recovery has been thus far."

The dollar held steady against a basket of currencies after the release of upbeat U.S. unemployment claims data.

USD/JPY traded at 118.89, compared to Thursday's low of 118.42. EUR/USD traded at 1.1364, off Thursday's high of 1.1450, however was still within the 1.1300-1.1450 range this week, as markets now focus on talks between Greece and the euro zone.

"We see room for another round of EUR weakness driven by omnipresent political risks (Russia/Ukraine and Greece) and downside to money-market rates when the ECB starts QE in March", said Christin Tuxen, Senior Analyst at Danske Bank. "Coupled with our view that the Fed will hike already mid year and that the re-pricing of the US yield curve will happen swiftly around the first hike, the potential for upside to US rates will be limited beyond 6M. EUR/USD downside from relative rates should thus be concentrated in H1".