Dollar Whipsaws After Soft NFP Report

The US dollar weakened across the board on Friday following a softer than expected NFP report. The headline number showed negative payroll growth, while average hourly earnings missed forecasts by a notable margin. This triggered a dovish repricing in interest rate expectations, with the probability of a September rate hike falling to 38%, compared with 54% before the release.

However, market pricing has since normalised, with the probability of a September hike rising back to 48%. The reason for this whipsaw in expectations is that there was a significant loss of government jobs, which made the report look much softer than it actually was. The unemployment rate painted a different picture, falling further to 4.1%.

The next major event will be the US CPI report on Wednesday, which will be critical for the September FOMC decision and the Jackson Hole Symposium. A hot report will likely trigger a rally in the US dollar, with traders increasing rate hike bets. On the other hand, a soft report should reduce further the risk of Fed tightening and put more pressure on the greenback.

The Japanese yen has continued to erase gains from recent intervention efforts, without any change in fundamentals. The trend is unlikely to change without a dovish repricing in Fed interest rate expectations or a faster BoJ tightening pace. Technical analysis suggests that USDJPY may be heading towards the 160.50 resistance level.