• Dollar in limbo after mixed signals from US employment report  

• Japanese yen and British pound capitalize most on dollar’s troubles

• Gold hits another record, but high-flying stocks correct lower

Dollar directionless after jobs data

The US labor market continues to cool, keeping the Fed on track to slash interest rates in the summer. Nonfarm payrolls overcame forecasts in February, clocking in at 275k. However, the rest of the employment report was disappointing with big negative revisions to previous months, the unemployment rate rising to its highest level in two years, and wage growth losing steam.

Once again, the two surveys flashed conflicting signals, as they often do around turning points in the economic cycle. Nonfarm payrolls continue to rise at a solid clip, yet the unemployment rate tells a different story, pointing to stagnant jobs growth for almost a year now.

Hence, labor market conditions have started to loosen, even if that hasn’t been captured in nonfarm payrolls yet. For the Fed, this means there’s less risk inflation will reignite in the future, allowing the central bank to proceed with the rate cuts it has telegraphed.

In the markets, the dollar absorbed some damage when the data was released, but managed to recover those losses in the following hours with some help from safe haven flows as the stock market corrected lower. The next major event will be tomorrow’s US inflation report, which could help the dollar assume a clear direction.

Yen and pound steal the dollar’s thunder

It turns out the Japanese economy dodged a recession after all, according to the latest GDP revisions. With the economy avoiding a downturn and growing signs that annual wage negotiations will conclude with robust pay increases for workers, speculation is running rampant that the Bank of Japan is ready to raise rates out of negative territory.

Markets are pricing in a 50-50 chance for a minor rate hike next week, while there are also reports that the BoJ is considering changes to its yield curve control strategy that would allow for higher yields over time. As such, the yen was the best performing major currency last week. The question is whether this is the beginning of a lasting recovery or just another false dawn.

The yen may have outperformed last week, but it is the British pound that has quietly taken the crown of the best performing currency of the year. Cable rose to its highest levels since July last week, as the pound overtook the dollar to become the top FX performer of 2024 so far.

Behind the pound’s ‘stealth’ ascent lies the notion that the Bank of England will be among the last central banks to cut rates as UK inflation continues to burn hot, alongside the meteoric rally in the stock market that benefits the pound because of the nation’s twin deficits.

Stocks take a step back, but gold keeps going

Shares on Wall Street encountered some turbulence after nonfarm payrolls, with the S&P 500 closing down by 0.65% to erase its gains for the week, despite the jobs report being consistent with the narrative of looming rate cuts.

Of course, the equity market is still trading near record highs, so this retreat was probably driven by some profit-taking in high flying shares, rather than a genuine rethink on the economic outlook. Nvidia fell more than 5%, dragging other chip stocks down with it.

Meanwhile, gold prices hit another record high on Friday, having risen more than 6.5% so far this month. It’s been a perfect storm for gold, as the retreat in the dollar and real yields has joined forces with record-setting purchases from central banks and booming demand from Chinese investors, something reflected in Shanghai gold prices trading at a hefty premium over London.