Dollar Under Pressure Ahead of Key Jobs Report

March 07, 2025

Win Thin

The U.S. backtracked on tariffs for a second time this week; February jobs report Friday will be the data highlight; Fed officials remain cautious; Canada highlight will also be jobs data; Mexico reports February CPI
The ECB cut rates 25 bp, as expected; President Lagarde remained noncommittal about the policy path; reports suggest a tug of war at the ECB in April
Reports suggest the BOJ is likely to keep rates steady at the March 18-19 meeting; China January-February trade data continue to point to weak domestic demand

The dollar remains under pressure ahead of the jobs report. DXY is trading lower for the fifth straight day near 103.740 and is testing the November 5 low near 103.373. Clean break below sets up a test of the September low near 100.157. USD/JPY is trading lower near 147.70 despite reports of a cautious BOJ (see below). The euro is trading higher near $1.0850 in the wake of the ECB decision (see below), while sterling is trading higher in sympathy near $1.2915. Recent softness in the U.S. data is concerning and has weighed on the greenback. We are not ready to push the panic button yet but if the data continue to soften, the strong USD fundamentals of strong growth, elevated inflation, and a more hawkish Fed will come into question. Jobs data today will be key. Fed officials remain cautious (see below) and so we expect the Fed to deliver a neutral hold this month. Lastly, tariffs should help keep the dollar firm but so far this week, the twists and turns (see below) have instead fed into dollar softness. The dollar should eventually get some traction as the prospects of higher inflation from tariffs should keep the Fed hawkish, but markets are for now focusing on the potential recessionary impact instead.

AMERICAS

The U.S. backtracked on tariffs for a second time this week. After hitting Canada and Mexico with 25% tariffs on Tuesday (with a reduced 10% rate for Canadian energy), the Trump administration announced Wednesday that the 25% tariffs on autos and auto parts traded through the United States-Mexico-Canada Agreement (USMCA) would be paused for one month. Then yesterday, the Trump administration delayed tariffs on all goods covered by the USMCA until April 2. In response, Canada postponed planned counter-tariffs of 25% on CAD125 bln worth of U.S. products until April 2 from March 25 previously.

Regardless, other tariffs loom. These are expected to have a significant adverse economic impact on Canada and Mexico given their very strong integration and exposure to the US market. 25% tariff on all steel and aluminum imports into the U.S. will go into effect March 12 and a wider round of “reciprocal” tariffs are due as soon as April 2. It’s worth noting that USD/CAD and USD/MXN have retraced all the gains triggered by the initial US executive order on February 1 to impose duties on Canada and Mexico.

February jobs report Friday will be the data highlight. Bloomberg consensus for NFP is 160k vs. 143k in January, while its whisper number stands at 122k. For reference, payroll job gains averaged 237k per month over the past three months, with last month's gains likely held back by the Los Angeles wildfires and the harsh winter weather across much of the nation. The unemployment rate is expected to remain steady at 4.0%. If so, it would track below the Fed’s 2025 projection of 4.3%. Average hourly earnings are expected to remain steady at 4.1% y/y. Overall, wage growth is running around the sustainable rates consistent with the Fed’s 2% inflation target given annual non-farm productivity growth of around 2%.

Risks to February non-farm payrolls are skewed to the downside. The February ADP private employment gains undershot expectations whilst Challenger layoff announcements totaled 172,017 in February, the most since July 2020. The federal government accounted for the largest share of announced cuts (62,242), reflecting the impact of the Department of Government Efficiency (DOGE) actions. This may not show up in today’s data, as many of the layoffs came right around the time of the BLS survey and could instead be picked up in the March jobs data. It’s worth noting that total federal jobs account for less than 2% of total non-farm employment. However, we have seen estimates that for every Federal worker, there are two contractors dependent on them for work. Bottom line: weak job gains in February would raise the odds of an economic downturn and further weigh on USD. In contrast, evidence that the labor market remains in solid shape should lead USD to retrace some of its recent sharp losses.

Fed officials remain cautious. With regards to inflation moving towards the 2% target, Harker said “I’m not saying it’s not going to happen. But it seems like there’s a lot of pressures building where that might not be the case.” He added that given all the uncertainty, “In that kind of situation you don’t move very fast in either direction.” Waller said “If the labor market, everything, seems to be holding, then you can just kind of keep an eye on inflation. If you think it’s moving back towards target, you can start lowering rates. I wouldn’t say at the next meeting, but could certainly see going forward.” Bostic acknowledged the potential impact from Trump policies and noted “The question is, how does this all sort out? I’d be surprised if we got a lot of clarity before the late spring into summer.”

Chair Powell will get a final chance to shape market expectations. He speaks this afternoon on the economic outlook and is likely to echo the cautious sentiment that seems to be Fed consensus. Virtually all Fed officials are acknowledging the potential impact of Trump policies but are also counseling caution. This suggests we are in for an extended Fed pause but it will all come down to the labor market data. Bowman, Williams, and Kugler (twice) also speak today. At midnight tonight, the media blackout goes into effect and there are no Fed speakers until Chair Powell’s post-decision press conference March 19.

The growth outlook remains cloudy. The Atlanta Fed's GDPNow model is tracking Q1 growth at -2.4% SAAR and will next be updated March 17 after the data. As we have noted before, the Q1 growth estimates so far are basically based on one or perhaps two months of data and so the early numbers can bounce around quite a bit as more inputs are reported. Elsewhere, the New York Fed's Nowcast model is doing better and has Q1 growth at 2.9% SAAR. It will be updated today and the model will also provide its first estimate for Q2 growth at the same time.

Canada highlight will also be jobs data. Consensus sees a 20.0k rise in jobs vs. 76.0k in January, while the unemployment rate is expected to rise a tick to 6.7%. Overall, the labor market remains soft and firms’ hiring intentions are muted. Markets are pricing in nearly 75% odds of a 25 bp cut at the next meeting March 12 as well as a total of 50-75 bp of total easing over the next 12 months. That said, we expect the BOC to pause easing next week, in part because core inflation (average of trim and median CPI) is tracking above the BOC’s Q1 projection of 2.5%.

Canada’s Liberal Party will choose its new leader this Sunday. The new leader will effectively become the new Prime Minister as Justin Trudeau resigned. Once parliament reopens on March 24, the new Liberal leader will no doubt face a vote of no confidence that will trigger snap federal elections. However, it’s worth noting that recent polls have shown a resurgence in support for the Liberals as the Conservative Party’s ties to President Trump are shaping up to be a potential liability amongst the voters due to U.S. tariffs.

Mexico reports February CPI data. Headline is expected at 3.75% y/y vs. 3.59% in January, while core is expected at 3.63% y/y vs. 3.66% in January. If so, headline would accelerate for the first time since October but would remain within the 2-4% target range. At the last meeting February 6, Banco de Mexico cut rates 50 bp to 9.5%, as expected. However, it was a dovish cut as the bank said “The Board estimates that looking forward it could continue calibrating the monetary policy stance and consider adjusting it in similar magnitudes.” The swaps market has reacted to the dovish signal and is now pricing in 150 bp of further easing over the next 12 months that would see the policy rate bottom near 8.0% vs. 8.5% before the February decision.

EUROPE/MIDDLE EAST/AFRICA

The European Central Bank cut rates 25 bp, as expected. More importantly, the ECB stressed that “monetary policy is becoming meaningfully less restrictive” and raised the bar for more easing. Still, the ECB’s updated macroeconomic projections suggest rate cuts cannot be ruled out. Its GDP growth forecasts were marked down for both 2025 and 2026, while headline CPI inflation is still expected to average 1.9% over 2026.

President Lagarde remained noncommittal about the policy path. She stressed that “If the data indicates that the most appropriate monetary-policy stance is a cut, it will be a cut. If, on the other hand, the data indicates that the most appropriate decision is not to cut, then it will be a pause.” Lagarde added that "We have huge uncertainty. We have risks all over, and uncertainty all over." That said, Lagarde said there were no dissents, though Holzmann abstained. Holzmann is the most hawkish governing council member so his abstention won’t move the dial on rate cut expectations. Recall that Holzmann was the sole member to oppose the rate cut last June.

Reports suggest a tug of war at the ECB in April. Unnamed officials predicted tough negotiations over whether to cut rates further or stand pat when the bank next meets April 16-17. Another cut next month seems like a no-brainer to us but markets are nonetheless adjusting and see only 65% odds of a cut then. It’s worth noting that the stronger euro acts like monetary tightening and has likely wiped out much of the stimulative impact of this latest 25 bp cut. Looking ahead, the swaps market is pricing in 50-75 bp of total easing that would see the policy rate bottom between 1.75-2.0%.

ASIA

Reports suggest the Bank of Japan is likely to keep rates steady at the March 18-19 meeting. This should come as no surprise, but reports suggest BOJ policymakers see no need to hike again so quickly after doing so at the last meeting in January. Instead, they want to wait to see the impact of that hike as well as to see how U.S. policies will affect both the domestic and global economies. Of note, the market is still pricing in the next hike in September.

China January-February trade data continue to point to weak domestic demand. Exports rose 2.3% y/y vs. 5.9%, while imports plunged -8.4% y/y vs. 1.0%. As a result, the trade surplus rose more than expected to $170.51 bln vs. $147.50 bln expected. China cannot rely on exports to sustain a recovery in economic activity and needs to stimulate consumer spending.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2024. All rights reserved.