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Jobs data seen pushing Fed towards rate hike and dollar higher

The US dollar rose to a 6 ½ month high versus the euro and a 2 ½ month high versus the yen today, following the release of a surprisingly strong employment report out of the United States.  As the Fed has professed to being data-dependent concerning the decision, the strong data that has been received means that a potential rate hike – the first since 2006 – is now closer to becoming reality.

Today’s jobs number could even go as far as to counterweigh any potential weaknesses of next month’s reports, as the Fed could claim that on average, the reports taken together indicate a healthy labor market.

The boost that the US dollar has received could push it to challenge the year’s low in euro / dollar around 1.05 and the high in dollar / yen around 125.50.  Pound / dollar also looks like a candidate to get out of its recent 6-month range by breaking below 1.50.  This has become more likely given the relative dovishness on display this week by the Bank of England by being very vague on its plans to raise interest rates (maybe sometimes in the next 12 months, depending on developments…).

The Federal Reserve will also look for confirmation from inflation statistics, which come out on November 17.  If inflation is in line with recent readings and there are no hints of deflationary forces increasing, it will be another important item on the Fed’s checklist when it meets in around 40 days’ time.

Stocks and risk assets posted a modest drop following the release of the data, which could be the result of some profit-taking after an impressive run lately.  Financial markets and risk assets in general will also need to avoid any dramatic moves, before the Federal Reserve decides to hike.  Overall investors now should become prepared for non-zero US interest rates.

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