US Dollar Forecast: After Strong Jobs Data, Will Inflation Reinforce Fed’s Caution?

U.S. Dollar Strengthens as Jobs Data Delays Fed Rate Cut

The U.S. dollar edged higher on Friday after the latest jobs report signaled that the Federal Reserve may keep interest rates unchanged for longer. While job growth slowed more than expected, the unemployment rate dropped, reinforcing the view that the labor market remains stable. This reduces the urgency for the Fed to begin cutting rates, supporting the dollar’s strength.

Nonfarm payrolls rose by 143,000 in January, below the 170,000 estimate. However, the unemployment rate dipped to 4.0% from 4.1%, and average hourly earnings climbed 0.5% for the month, surpassing the 0.3% forecast. The dollar index (DXY) touched 108.02 before settling at 107.88, with stronger wage growth and lower joblessness helping limit downside pressure on the currency.

Treasury Yields Climb, Adding to Dollar Support

U.S. Treasury yields moved higher following the employment data, adding further support to the dollar. The 10-year yield rose to 4.509%, up 7 basis points, while the 2-year yield climbed to 4.287%, a sign that traders are adjusting to expectations of prolonged Fed tightening.

Higher yields make U.S. assets more attractive, increasing demand for the dollar. With the Fed unlikely to cut rates in the immediate future, investors seeking yield are likely to keep capital in dollar-denominated assets, providing a bullish foundation for the currency.

Inflation Fears Resurface, Fueling Market Uncertainty

The University of Michigan’s consumer sentiment survey showed a significant jump in near-term inflation expectations. Consumers now anticipate inflation at 4.3% over the next year, up from 3.3% in January. This rise, driven by concerns over potential price increases from new trade tariffs, signals that inflation pressures remain a risk.

This development could reinforce the Fed’s cautious stance on rate cuts. If inflation remains sticky, the central bank will have less room to ease policy, further supporting the dollar. Stocks initially fell on the report, reflecting broader uncertainty as investors weighed the potential for higher-for-longer interest rates.

Market Outlook: Dollar Bulls in Control as Rate Cuts Face Delays

With wage growth firm and inflation expectations rising, the dollar is poised to remain strong. Treasury yields continue to support the currency, and the Fed has little reason to rush into rate cuts.

Unless upcoming inflation data shows a significant decline, traders should expect the dollar to stay resilient. A shift in Fed rhetoric or a material weakening in labor market conditions would be needed to drive sustained bearish pressure. For now, the dollar remains well-positioned against its major peers.

More Information in our Economic Calendar.