The US dollar buoyed by the jobs report (Daily analysis 8.03.2021)

The greenback continues an upward trajectory after the US Department of Labor reported a strong employment gain on Friday.

The EUR/USD pair has already eroded the 1.19 mark. The common currency, the Swiss franc and the Japanese yen, are the biggest underperformers in the G-10 space. The Polish zloty is the worst performing currency among those the most important due to a combination of a dovish central bank, troubling epidemic situation and an upcoming Supreme Court's ruling on FX denominated mortgages, which may undermine the health of the banking sector.

The US labour market is just getting started

The US labour market data are highly volatile, subject to strong revisions and, due to the methodology of the Department of Labor estimates, can be heavily distorted by one-off factors. They can also be a poor reflection of reality under very rapidly changing conditions. We are in the midst of a pandemic. After the first reading of January data, investors were clearly disappointed with employment growth below 50 thousand jobs. After revision, it turned out that in the first month of the year, 166 thousand payrolls were created, which would be a decent result against the expectations at that time.

In February, non-farm employment in the US increased by nearly 380k people, almost twice as much as forecast. The private sector led the way, and job creation is expected to accelerate sharply in the coming months. The start of the easing of restrictions in California must have played a large role. Still, the latest report is in line with other information pointing to a strong momentum in the US economy, which will result in a powerful acceleration after unfreezing and receiving a massive fiscal stimulus. The swift pace of the vaccination program and the declining number of hospitalized patients are allowing for thawing, according to the Governors of Texas and Tennessee. More states are lining up, and construction employment will also begin to grow seasonally any day now. As a result, the labour market condition should continue to improve dynamically in the coming months. Despite the "recovery" of over 13 million jobs, one should not forget that employment in the economy is still about 10 million lower than a year ago. It is this aspect that the Fed is focusing on, which investors do not understand. They are betting on a stronger increase in inflation and faster normalization of the policy than the monetary authorities assume, and the result of this belief is the ongoing sale of bonds and strengthening of the dollar.

Week ahead: ECB decision time, US inflation data

After last week's fiasco regarding Jerome Powell's management of the turbulence affecting Treasury bond markets, the spotlight will be on inflation data from the US, which will be released on Wednesday and may well add fuel to the fire of sell-offs. Another factor that may support further increases in yields is the Department of Treasury's auctions, where long-term securities will be placed. Other important readings will be Tuesday's small business sentiment report, Thursday's jobless claims data, the number of job openings, and the week's final preliminary consumer sentiment data.

On the Old Continent, the week will begin with a minor publication of the sentix index, which reflects investors' sentiment. Thursday's meeting of the European Central Bank will be the highlight of the week. In recent days, representatives of the Governing Council have shown far-reaching concern about the tightening of financial conditions resulting from trends in the bond market, which threatens the fragile economic situation. They have also repeated there is room for further reductions in the cost of money.