Amid the Ukraine crisis and a darkening outlook for global growth, the latest US jobs report will take center stage on Friday (12:30 GMT). Prior to that, the Fed’s preferred inflation measure is released on Thursday. The data should boost confidence in the US economy even as the risk of a recession increases in Europe. But is there a danger that the Fed is about to tighten policy too aggressively and how much will this week’s numbers matter for the US dollar?

A very tight labor market

There is no doubt that the US labor market is extremely tight at the moment and Friday’s employment figures will likely show that hiring conditions have tightened further in March. Nonfarm payrolls are expected to have risen by 490,000 in the month – a slower pace than February but still a very healthy gain. As a result, the unemployment rate is expected to have fallen by 0.1 percentage point to 3.7% in what would mark a new post-pandemic low.

Wage growth is expected to have accelerated after slowing in February. The average hourly wage is expected to have risen 5.5% year-on-year in March, from 5.1% the previous month.

Fed becomes more hawkish as inflation continues to rise

A day earlier, data on personal income, consumption and PCE inflation should be equally bullish. Personal income and spending likely both rose 0.5% month-on-month in February, while the core PCE price index is expected to edge up to 5.5% year-on-year to reach a new multi-decade high.

Speculation about how many times the Fed will raise interest rates this year grew last week after Chairman Jerome Powell hinted that the central bank may need to act more quickly in upcoming meetings after the takeoff. 25 basis points in March. So far, all economic indicators support a more aggressive tightening cycle, but the main concern is that the positive outlook does not last very long.

Are American consumers about to become more cautious?

In Europe, the latest survey data suggests that consumer and business confidence has started to take a hit from the fallout from the war in Ukraine. Policymakers at the European Central Bank and, increasingly, the Bank of England, are cautious about committing to a specific rate path, as they expect some of the inflationary pressures to begin to fade at as demand stumbles due to pressure on consumers and businesses from soaring prices.

There is only slight evidence of a weakening outlook among US businesses and Friday’s ISM manufacturing PMI should shed more light on this. However, some measures of consumer sentiment tell a different story. Specifically, the closely watched University of Michigan gauge fell to its lowest since 2011 in March, suggesting consumers are growing increasingly alarmed by the worsening cost-of-living spiral.

Risk of excessive Fed tightening

The problem, however, is that the Fed is already so far behind the inflation curve that it is unlikely to reverse its hawkish stance unless inflation shows signs of peaking – the odds of which are very slim as long as sanctions against Russia remain in place – or the labor market recovery reverses.

Traders have currently priced in a more than 200 basis point hike in the fed funds rate by December, implying at least two 50 basis point hikes. The bond market seems to agree. But even though short- and long-term Treasury yields have rallied strongly since the start of the year, parts of the yield curve have briefly converted or are about to invert, signaling a possible recession.

However, for most investors it is too early to be overly concerned about the risk of a US slowdown and the Fed is only in the very early stages of policy normalization. Therefore, the dollar rally potentially still has a few steps to go.

Can the dollar extend its impressive uptrend?

The powerful greenback hit a 6.5-year high at 125.10 yen on Monday before falling back to 123 yen closer. If the data ahead is stronger than expected, the dollar could stretch its gains a bit further, although they are unlikely to drastically alter the Fed’s policy outlook.

The dollar/yen could rally towards the 125 handle and if it has a better chance of breaching this barrier a second time, the 461.8% Fibonacci extension of the January decline at 126.76 could be the next target. bulls.

Alternatively, if the dollar/yen fell back, the 122 level followed by the 261.8% Fibonacci extension of 121 could block any declines, while deeper losses would highlight the 161.8% Fibonacci of 118.12.

Judging by the CPI report and the recent Weekly Jobless Claims, big negative surprises don’t seem too likely in the NFP or PCE inflation numbers, so there may be a bigger reaction. to any shock in the manufacturing ISM impression.