US Jobs Surge Shakes Markets as Dollar Climbs and Yields Soar
A robust US jobs report sent ripples through financial markets on Friday, propelling the US dollar to its highest level since November 2022 and triggering a surge in yields across the curve. The report revealed an above-consensus increase of 256k jobs, accompanied by a drop in the unemployment rate to 4.1%, with only minor downward revisions to the prior two months. While the labour market strength was anticipated, the scale of the surge exceeded expectations, as forecasts had predicted a 190k increase (compared to a 160k consensus).
This development signals to the Federal Reserve (Fed) that rate cuts are unlikely in the first half of the year. Investors have adjusted their expectations, now anticipating policy easing to begin in October. The resilience of the US labour market has been remarkable, particularly given its continued strength following the 2022 yield curve inversion—a rare phenomenon. This anomaly may partly explain the sharp rise in yields, despite the Fed initiating its easing cycle.
British Pound Slides Amid Stagflation Worries and Rising Yields
The British pound extended its decline on Monday, with GBP/USD falling below $1.22 to its lowest level since November 2023, while GBP/EUR dropped below €1.19 for the first time in over two months. Mounting concerns about stagflation in the UK are weighing on the currency, as inflation—particularly in the services sector—remains stubbornly high amid signs of economic weakness.
The UK’s two-year inflation breakeven rate has surged by 70 basis points since the autumn 2023 budget, which unveiled ambitious borrowing and spending plans. While UK gilt yields have moved in tandem with US Treasury yields, the pound has weakened as the US dollar strengthened. This reflects the mounting pressure on the UK government as gilt yields climb higher. Over the weekend, UK Chancellor Rachel Reeves reaffirmed that the fiscal rules laid out in October’s budget are non-negotiable, encouraging traders to test key support levels for sterling.
This week, markets will closely watch the UK’s December inflation data, with Wednesday’s report expected to show headline consumer prices rising 2.6%, matching the previous figure. Additionally, GDP and retail sales data will be scrutinised for signs of a recovery in consumer spending, which could provide some much-needed relief for the pound.
EUR/USD Slides as USD Strength and European Risks Weigh on the Euro
EUR/USD continues its downward trend, trading in negative territory for a fifth straight day and approaching the $1.02 level during the early European session. The pair’s decline is largely driven by broad-based US dollar strength following a robust US jobs report, while weak domestic factors—both cyclical and political—add further pressure on the euro.
Similar to the UK, Europe faces stagflation risks. December inflation data showed an uptick, mainly due to fuel price base effects, alongside resilient services sector numbers. While this could suggest caution for the European Central Bank in easing policy, the Eurozone's bleak growth outlook complicates the situation. Challenges include China’s economic struggles and potential trade tensions with the US, creating a mix of stagnating growth and persistent inflationary pressures that undermine the euro.
Political uncertainty within Europe further exacerbates the euro’s struggles, highlighting the need for fiscal interventions, particularly in Germany, to rejuvenate the sluggish economy.
With limited high-impact European data scheduled for the week, EUR/USD is likely to remain influenced by external factors. The continued economic outperformance of the US does not bode well for the euro in the near term.
