Comment Thomas DeGalloway

Wednesday morning 09:15 — Thomas de Galloway

On Friday, the monthly US jobs report (known as non-farm payrolls) showed that 236,000 new jobs were added in March. This was in line with analyst expectations. The unemployment rate fell by 3.5% from the previous month. The market took the news positively for the dollar, leading the euro-dollar to end the week in the red.

This, of course, has everything to do with the policy of the Fed, the US central bank. Last month there was a serious crisis in the bank. Because of this, the central bank is more likely to pause its most aggressive interest rate campaign in decades. Now the cards are different again. The banking crisis is fading more and more into collective memory and calm has returned to financial markets for the time being.

As a result, the market is once again focusing on the central bank’s second mandate (besides guaranteeing stability in the financial system), namely the fight against inflation. A strong jobs market is contributing to this, significantly increasing the likelihood of a final rate hike of 0.25% on Friday. After this, a long pause is expected, after which the first interest rate cuts will be visible by the end of 2023, according to market researchers.

Pause for good news for the rest of the world
The fact that a pause in the US is imminent is good news for the rest of the world. When the central bank started last year, other countries were forced to follow suit. The attractive interest rates of the United States swallowed up large sums of global capital, resulting in the weakening of the currencies of emerging countries. Because their debt is mainly in dollars (and therefore more expensive to pay), these countries are dealt a double whammy.

This is about to change now. According to financial news agency Bloomberg, global interest rates will be 6% in the third quarter of 2023, before falling to 4.9% by the end of next year. The only exception is Japan. This maverick is one of the only countries in the world where interest rates are negative. Economists expect them to increase to 0% by 2024.

European interest rates rise and fall
Closer to home, European rates are expected to rise to 3.5% before easing to 1% in 2024. A dynamic force that could provide euro strength in the medium term is the prospect of a US recession. Their economies may also take the brunt of the blow, as they launch first and find it harder to push the accelerator pedal. The jobs report also shows that the job market is starting to show cracks in some areas. For example, the number of workers on temporary contracts fell sharply. This may mean that employers who see demand decrease need fewer workers.

Contrast this with Europe, where member states have so far been more successful in staving off recession. Growth is not far from zero, but ahead of US growth. In this scenario, the US Federal Reserve should cut interest rates faster than the ECB, which would have a positive effect on the Euro-Dollar in the medium term.

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