Key points:

  • The US NFP report will have a significant impact on the Fed’s interest rate decisions.
  • The escalating geopolitical situation in the Middle East has increased demand for safe haven assets, including the dollar.
  • The Japanese yen is weak on expectations that the Bank of Japan will maintain its easy monetary policy.

The US dollar hovered near its highest in six weeks on Friday, amid expectations for the release of employment data that could have a significant impact on the path of US interest rates.

At the same time, the Japanese yen showed a sharp rise, trying to stabilize the situation after a turbulent week caused by uncertainty over the outlook for Japanese monetary policy.

NFP data to influence Fed decision

The dollar index, which measures the strength of the American currency against a basket of six other currencies, closed the latest trading session at 101.88 points, which is only slightly below the six-week high of 102.09 points reached the day before. Over the past week, the index has shown an increase of almost 1.5%, which is the most significant increase since April of this year.

The strengthening of the US dollar is explained, among other things, by the growing demand for safe assets against the backdrop of escalating geopolitical tensions in the Middle East and investor concerns about its potential negative impact on the global economy.

However, the main focus of market participants on Friday will be on the publication of data on employment in the US non-farm sector. The data show a slight slowdown in the pace of growth of the US labor market at the end of the third quarter.

The employment report is released against the backdrop of conflicting signals coming from the US economy. On the one hand, there is an improvement in a number of economic indicators. On the other hand, Federal Reserve Chairman Jerome Powell has somewhat cooled market expectations regarding a significant rate cut in the near future in his recent speech.

According to the CME FedWatch tool, the probability of the Fed cutting rates by 50 basis points in November has fallen from 49% to 33%. Recall that last month the Federal Reserve already cut interest rates by 50 basis points.

According to Kieran Williams, head of Asia FX at InTouch Capital Markets, the publication of stronger-than-expected employment data in September could be perceived by the market as a “dovish” signal, since it will bring the unemployment rate in line with the Fed’s forecasts. In this situation, some Fed members may support the idea of ​​​​cutting the rate by 50 basis points as early as November.

Yen strengthens briefly, sterling nears lows

The Japanese yen, having recovered some of its losses over the week, strengthened by 0.5% and reached 146.18 yen per dollar. However, the Japanese currency rate remains close to a six-week low of 147.25 yen per dollar set the day before.

Despite the short-term gain, the yen is showing its worst performance since May 2022, having lost about 2.7% in a week. The main reason for this decline was comments by new Japanese Prime Minister Shigeru Ishiba, who said that the Japanese economy is not ready for further interest rate hikes. This statement was perceived by the market as a signal that the Bank of Japan will maintain its loose monetary policy in the near future.

Investors are closely monitoring the comments of Japanese politicians and regulators, which are generally dovish, indicating a willingness to maintain loose monetary policy. Ishiba’s statement was the most vivid confirmation of this sentiment.

Sterling also came under pressure after Bank of England Governor Andrew Bailey raised the possibility of more aggressive interest rate cuts if inflation pressures ease. On Friday, the pound was trading at $1.3127 per pound, close to a three-week low. Despite the recent decline, sterling has gained more than 3% so far this year, amid expectations that interest rates in the UK will remain high.

The Australian dollar showed little movement, ending trading at $0.6843 per Australian dollar. Despite this, the Australian currency lost about 0.8% for the week, snapping a four-week winning streak.

The euro remained stable at $1.1029 per euro, but over the week the European currency weakened by 1.2%.