U.S. Dollar Rallies; Gold, Currencies Weaken as Strong Jobs Data Puts Rate Hike Back in Picture

The U.S. Dollar rallied on Friday as investors digested mixed U.S. employment data. According to the Bureau of Labor Statistics, the U.S. economy added 151,000 jobs in January. Economists were looking for an increase of 189K. The government also adjusted downward the December figures.

On paper, the headline number looked weak, and the dollar declined initially. However, the unemployment rate fell to 4.9% and the Average Hourly Earnings came in stronger at 0.5%, beating the 0.3% estimate.

With the unemployment rate improving and average hourly earnings surging, investors ratcheted up the possibility of another Fed rate hike in 2016, driving up the U.S. Dollar.

The U.S. Trade Balance deficit increased to -43.4B versus an estimate of -42.9B. This was also higher than the last reading of -42.2B. The trade balance widened in December because of the rising dollar and weak global demand for U.S. goods and services.

April Comex Gold, the Euro and the British Pound all broke sharply from their recent highs when the U.S. Dollar strengthened. The surprise strength in the components of the jobs report gave investors an excuse to book profits.

March Crude Oil futures gave up its earlier gains with the release of the jobs report. The stronger Greenback contributed to the decline because crude oil is a dollar denominated currency. However, other bearish fundamentals kicked in and the market turned lower for the session. The surplus inventory situation continued to weigh on nearby futures contracts.

This week, crude oil futures posted several volatile sessions that moved the market over 10 percent at one point within a day. The week started under pressure as traders took off the table a possible meeting between OPEC and non-OPEC meeting. The market broke further at mid-week after the release of bearish inventory reports by the American Petroleum Institute and the U.S. Energy Information Administration.

The EIA report showed that U.S. crude inventories climbed 7.8 million barrels in the week to January 29 to 502.7 million barrels. Gasoline inventories rose to a record high, soaring 5.9 million barrels to 254.4 million barrels.

After hitting its low for the week, the market rallied after Russia said it was open to a meeting between OPEC and Non-OPEC countries to discuss the possibility of production cuts. At the end of the week, however, no meeting was scheduled and the market weakened on Friday after the release of the jobs report.

Gold and currency Investors should look forward to more near-term volatility as they try to determine if the Fed sees enough fire power in the economy to continue its tightening monetary policy. Crude oil traders will also face increased volatility as they continue to deal with rumors about the possible production cut meeting.