Dollar Relents On Fed’s Murky Outlook For Rate Hike

After China’s surprise devaluation of the yuan, U.S. financial markets have slightly pushed rate hike expectations to December. Neither of these has reached a satisfactory level by Fed measures.

Fischer’s “emphasis on inflation was very interesting – coming after an employment report to say firmly that the problem is not with employment, the problem is with inflation”, she said. “But it doesn’t lead to a high quality of life”, Nakosteen said. While wage growth is being seen, it remains fairly subdued by U.S. standards and the stronger dollar won’t be helping this. “July’s manufacturing PMIs failed to point to any meaningful pickup in the Chinese economy, therefore a keen eye will be kept on the official “hard” data for clues on the health of the economy“, Investec analysts said in a note.

EUR/USD surged on Monday above 1.10, amid fresh indications that a comprehensive Greek bailout could be completed before the end of the month and that the Federal Reserve will raise short-term interest rates in September.

“Compared to earlier in the year, we know a lot more and can shelve some concerns”, Lockhart said. The Fed, now targeting a range of zero to 0.25 percent, has not raised interest rates since 2006.

But as it considers whether to lift rates as soon as next month, the Fed’s key focus is the growing durability of the U.S. labor market.

“Monetary policy will still be very accommodative even after the first couple of Fed rate hikes”, said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Florida. This has made it hard to assess just how healthy the job market is and when pay might rise at a faster rate. In addition, the duration of unemployment benefits was lowered in 2013, making the loss of a job more costly and thus making workers less demanding.

Friday’s unemployment rate will be watched closely for another signal about the Fed’s next step. Now, more than a half-dozen years into the recovery, Fed Chair Janet Yellen has suggested that the economy not only can tolerate but needs higher rates.

Inflation forecasts were little changed from the July survey.

In a speech Monday afternoon, Atlanta Fed president Dennis Lockhart said “I think the point of liftoff is close”, even if there’s no “foreordained date”. The dollar strengthened Friday after the July jobs report just about matched investors’ expectations, but it quickly retraced those gains.

Stocks remained weighed down for the next several weeks at minimum as we weigh data for importance to the Fed’s September decision.

The economist noted that a whopping 93 per cent of people not in the labour force simply don’t want a job.

Reuters said the additional jobs were short of the 223,000 that economists were expecting, while the wage increase is also short of the 3.5 percent associated with full employment.

Further, he added, “July motor vehicle sales were a robust 17.5 million units, which bodes well for hiring because households typically do not purchase big-ticket consumer goods if job and income prospects are not improving”.