The US dollar rebounds after non-farm payrolls. What drives it

The US dollar has recovered the decline of non-farm payrolls and – in most cases – even more.

EUR/USD is down to 1.0560 from a high of 1.0630.

I think – or at least hope – that most of this has dived deeper into non-farm payrolls. In fact you have two surveys and the establishment number was good (227K compared to 200K previously) while the housing survey was softer with 355K jobs lost and unemployment at 4.2457% vs 4.145% previously.

The thing is, the response rate to the housing survey has been falling and the Fed has been skeptical about month-to-month volatility.

Nonetheless, the market is right about non-farm payrolls contributing to the December cut. That has risen to 83% from 70% before the data. It would have taken a serious jobs report to stop the Fed.

But looking further out, the jobs report does not indicate a recession and should keep the Fed from cutting too deeply. You can compare that to Europe or Canada who have every reason to cut rates to 2.00% in time, or lower.

Now the other explanation for the strength of the dollar – which I hate – is that the UMich sentiment survey was hotter and comments from Fed Governor Bowman were hawkish. The UMich survey is heavily influenced by politics and does not give much indication of spending while Bowman is always hawkish.

Here is a comment from former Boston Fed President Eric Rosengren that is somewhat relevant:

Expect a hawkish cut at the feed meeting. 25 basis points cut but further improvement in inflation is required for further cuts. Expect fewer cuts at next year's SEP than September's SEP with much uncertainty about fiscal actions on trade and immigration.

What makes the dollar bounce somewhat surprisingly is the Fed's chances of not moving from the first NFP swing and US short term yields at record lows.