The US labour market has shown resilience

• Geopolitics will cause more pain for Europe than for the US.
• The markets are wrong about the ECB raising interest rates.

The US labour market is creating new jobs at a slower pace than it was a year ago. However, this pace is sufficient to maintain low unemployment, which fell from 4.4% to 4.3% in March. The number of people in employment rose by 178K last month following a decline of 133K in February. As a result, non-farm payrolls have risen by an average of 68K over the last three months.

The resilience of the labour market is a further argument in favour of the return of the American exceptionalism theme to markets. The US economy is less sensitive to the oil crisis than Europe or Asia. The United States can benefit from it as a net energy exporter. There is no fear that oil and gas reserves will be depleted as quickly as in other regions of the world. As a result, the dollar is rising, which in theory should keep inflation in check.

In Europe, the picture is exactly the opposite. The weakening of the euro is exacerbating inflationary risks. In 2022, the ECB was slow to raise rates, leading to CPI rising to double-digit levels. It is no surprise that the European Central Bank is now adopting a hawkish stance.

Its rhetoric is slowing the decline of the EURUSD, as it is creating market expectations of a deposit rate hike from 2% to 2.75%. We, however, believe that the ECB will not aggressively tighten monetary policy. The surge in inflation in 2022 was driven by post-pandemic demand. Now the issue is a shortage of oil supply. Combating this with monetary tightening is a major mistake. As soon as investors realise this, the pressure on the euro will be much more pronounced until the situation regarding oil and Iran changes.

Donald Trump never tires of issuing new ultimatums. This time, the US president is threatening to bomb power stations and bridges if the Strait of Hormuz is not opened. However, Tehran will not be intimidated so easily. Geopolitical risks remain high.

The strengthening dollar and rising yields on US Treasury bonds are keeping gold in check. However, if the Fed holds rates steady and inflation continues to accelerate, real yields on Treasuries will fall, which will help the precious metal.

The FxPro Analyst Team