RIDAY, the latest US non-farm payroll report was released, and it showed that a staggering 321,000 new jobs were created in the US in November. This is not a new record in itself, but it’s a clear fundamental trigger, as the markets expected 230,000 new jobs to be added. When more jobs are created than anticipated, there is a fairly straight-forward connection with the US dollar and short-term interest rates. Why?
When employment growth overshoots expectations, clearly it demonstrates that the labour market is doing better than expected. And if this continues for a few months, it will lower the unemployment rate even further, prompting more consumer spending and labour market inflation.
All in all, under such conditions markets boost short-term interest rates, as they front-run the US central bank, the Federal Reserve. This boosts the US dollar, which gained against the euro, pound sterling and the Japanese yen after the non-farm payrolls were released. This is a clear fundamental signal, which should be combined with the technical bullish trend of the US dollar.
Will this be the continued theme for 2015? Most experts seem to think it will be, and some are anticipating that euro-dollar may reach parity.
While this might be the case, if we reach parity, the road there will be patchy and exciting. And hopefully the journey will generate many pips for most traders.
Alejandro Zambrano is a currency strategy analyst at DailyFX.com.