USD: NFP report provides further evidence of tightening US labour market – MUFG

The US dollar has derived support from the release of another solid employment report which has helped to prevent the recent correction lower from extending further in the near-term notes Lee Hardman, Currency Analyst at MUFG.

Key Quotes

“The report revealed further evidence that the US labour market continues to tighten which is increasing upside risks to the outlook for inflation. Average hourly earnings growth rebounded sharply by 0.4% in December more than compensating for the weak -0.1% decline in November. It helped to lift the annual rate of average hourly earnings growth to a new cyclical high of 2.9% which almost back to the rates which prevailed prior to the global financial crisis.”

“The tightening labour market has likely contributed to the modest deceleration in employment growth as firms find it more difficult to hire workers to fill vacancies. Nonfarm employment growth has slowed to an average monthly pace of 180k in 2016 compared to 229k in 2015. The pace of employment growth remains solid and more than sufficient to tighten labour market conditions further if sustained.”

“The report should make the Fed more confident both that the US economy is close to full employment and that inflation will rise back towards their goal in the coming years. It supports the Fed’s recent more hawkish signal that they plan to raise rates more quickly in 2017 even before incorporating the full potential stimulative impact of President elect’s Trump’s plans for looser fiscal policy. If the US economy continues to expand at a solid rate at the start of this year, the Fed may decide to follow up their December rate hike sooner than currently expected in June. It could provide a fresh catalyst for further US dollar strength in the coming months.”