Dollar lower following Powell missive
While Friday’s jobs report in the US was something of a mixed bag – the economy added fewer jobs than expected in December but the unemployment rate edged down – the market pared back expectations for Fed rate cuts slightly following the data, helping the dollar extend its gains at the end of the week. However the US currency has given up some ground overnight, following a statement by Fed Chair Jerome Powell in response to the threat of criminal charges against him (relating to the renovation of Federal Reserve office buildings). Powell says the threat of criminal charges should be seen in the broader context of the Trump administration’s ‘threats and ongoing pressure…and is a consequence of the Fed setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.’ Powell adds that ‘this is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions – or whether instead monetary policy will be directed by political pressure or intimidation” (which is notable given that Trump is due to announce a new Fed Chair shortly). Not surprisingly perhaps, talk of the ‘sell America’ trade, which was in vogue following Liberation Day last year, is doing the rounds this morning. EURUSD and GBPUSD have rebounded to around $1.1680 and $1.3450 respectively, leaving EURGBP largely unchanged from Friday’s close of £0.8680.
US government 2-year bond yields rose by 6bps last week, most of the increase chalked up following Friday’s jobs data, while 10- and 30-year yields fell by around 3bps and 6bps respectively. German yields were broadly flat on Friday but fell by 3bps to 8bps across the curve on the week. Most notable though was the outperformance of UK bonds, with 2-year yields falling by around 10bps (to their lowest level since August 2024) and 10- and 30-year yields both down 15bps (to their lowest levels since December 2024). Equity markets had a positive first full week of trading in 2026, with the Stoxx Europe 600 advancing by 2.3% and the S&P 500 gaining just over 1.5%. European stocks have opened a touch lower this morning though following Powell’s missive, with the US set to follow suit later according to the futures market.
The US economy added 50k jobs in December, less than the consensus forecast for an increase of 70k. For Q4 as a whole employment fell by an average of 22k a month, reflecting a decline in federal government employment. Private sector employment increased by 37k in December, also slightly less than forecast (+75k), leaving the average monthly increase in Q4 at +29k, a slowdown from +57k p/m in Q3 (and an average monthly gain of 79k in H1 2025). The unemployment rate ended 2025 at 4.4%, down from 4.5% in November but almost half a percent higher than last year’s low of 4.0% in January.
It’s a busy week ahead in terms of economic data. The main release is tomorrow’s CPI report for December in the US, with headline inflation expected to be unchanged from November at 2.7% but core inflation seen edging up to 2.7% from 2.6%. Other US releases include retail sales and producer prices on Wednesday and industrial production on Friday. Industrial production is also scheduled in the Euro area (Wednesday), while UK data include November GDP on Thursday. A large number of central bank members, particularly from the Fed, are scheduled to speak over the course of the week.