Friday’s NFP Report exceeded expectations: so why did the dollar tank?

The Non-Farm Payrolls (NFP) report for February was scheduled for release last Friday – one week later than usual. It showed that the payroll employment rose by 311k in February, while the unemployment rate edged higher.

The release created much volatility in financial markets. Currencies, particularly, were impacted as the US dollar tanked on the news.

In February, the US economy added more jobs than the consensus estimates. As a result, the 3-month moving average of job gains firmed to 351k.

So why did the dollar tank while the economy added more jobs in February than the market expected?

The unemployment rate ticked higher

Earlier in the week, the Federal Reserve Chair, Jerome Powell, testified in front of the House and Senate. The two-day testimony triggered volatility in financial markets as the Fed Chair suggested that recent data favors a 50bp rate hike later in March.

As we reported here, the markets viewed Powell’s message as hawkish, and his hawkishness weighed on risk. As a result, stocks tanked, and the dollar firmed.

But after the NFP report, the dollar reversed its gains. One of the reasons is the unemployment rate, which ticked higher in February.

Powell argued that a higher unemployment rate is needed in the fight against inflation. Also, he hinted that the upcoming data to be released until the March decision will matter for the Fed.

The unemployment rate was one piece of data to watch. It showed that the Fed is on the right path in its fight against inflation and leans the balance towards a 25bp in March, and not 50bp.

Previous employment gains revised lower

Another reason for investors to sell the US dollar was the previous data. Employment gains in December and January were revised 34,000 lower than previously reported. The change softened the strong report for February.

By the end of the trading session and week, the dollar reversed some of its losses. Stocks never recovered, as news of a bank run in California made headlines.

All in all, the weeks ahead are crucial for the markets. The Fed is in the ingrate position of hiking rates when banks fail and the unemployment rate ticks higher.