US Interest Rate Forecast: Weak Jobs Cut Fed Hike Odds Ahead of CPI

Weak US jobs data reduced expectations for a Fed rate hike in September. The upcoming CPI report will be important for the Fed’s next decision. EUR/USD maintains its bullish outlook while the 1.1360 support holds.

The US interest rate outlook changed after the weak jobs report reduced expectations for Fed rate hike in September. The job losses and downward revisions showed that demand for workers is slowing even though the unemployment rate fell. But the inflation remains above the Fed’s target and makes the upcoming CPI report important for the next policy decision. The changing expectations for the Fed and ECB have also weakened the US dollar and supported EUR/USD.

This article discusses the jobs data, inflation outlook, the interest rate expectations and technical levels that may shape the next move in EUR/USD.

The US economy lost 23,000 jobs in July. The chart below shows a decline in jobs during the past three months. The May job growth was revised to 63,000 from 129,000. The June figure was also reduced to 20,000 from 57,000. These revisions decreased the number of jobs by 103,000 from the previous estimates. The rate of unemployment fell from 4.2% to 4.1% but that wasn’t a sign of broader improvement. The number of people in the labour force fell as more people stopped looking for work. The participation rate dropped to 61.4% which is the lowest rate for more than five years. This weakness indicates that the momentum in the labour market is lower than given by the unemployment rate.

Several other areas of the labour market indicated weaker demand for workers. The local government education job losses were 50,000 and there were 19,000 job losses in the retail sector. Moreover, the healthcare sector also received the increase of 22,000 jobs, which was lower than its average monthly increase from the year ago. The average hourly earnings grew just two cents and the annual wage growth also eased to 3.2%. These numbers provide the Fed with justification to not apply pressure on the employment side using the immediate rate hike.

The inflation rate dropped to 3.5% in June as compared to 4.2% in May. The core inflation also dropped to 2.6% from 2.9%. The energy inflation also eased slightly but still remains elevated at 15.5% in June. The drop in energy inflation in June was due to the lower oil and gasoline prices on easing optimism from the US-Iran war. The previous inflation report eased fears that the energy shock would bring about a permanent price increase.

The July CPI report will be released on Wednesday, August 12. The annual inflation is expected to slow to 3.4% while the core inflation is expected to fall to 2.5%. The Cleveland Fed’s model also calls for headline and core inflation rates of about 3.42% and 2.52% respectively for July. These estimates indicate that inflationary pressures are easing, but that inflation remains too high for the Fed to consider an immediate rate cut. The biggest uncertainty remains energy prices. Brent crude oil closed Friday at $85.29 per barrel. The price remains volatile due to the unresolved tensions between the US and Iran. The signs of an eventual deal between Iran and Oman in shipping routes emerged over the weekend. But Iran stated that this agreement may not automatically reopen the Strait of Hormuz. This uncertainty could keep oil prices unpredictable and keep the energy prices volatile.

The latest US jobs data changed the market expectations for the September rate hike. The market expected the Fed rate hike odds by 55% before the jobs data release. However, these...