US NFP report awaited amid Iran war

Dollar remains the ultimate have amid Iran war

The US dollar rebounded again gained against all but one of its major peers on Thursday, as the war in the Middle East intensified, dashing hopes of a de-escalation after a New York Times report said Iran appeared willing to discuss ending the war. The only currency which stood stronger than the US dollar yesterday was the Swiss franc, which is also considered as safe harbor during times of market turbulence.

US and Israeli jets continued bombarding Iran, with Iran retaliating by attacking Gulf cities and warning that the US would "bitterly regret" the torpedoing of an Iranian warship near Sri Lanka. US President Trump said that he wanted to be involved in choosing Iran’s next head of state, adding that Mojtaba Khamenei, the son of the late supreme leader, is not a good choice.

US jobs report could help further reduce Fed cut bets

Although the US dollar is pulling somewhat back today, there may be scope for more gains as the war shows no signs of easing, and a strong NFP report today may be a reason for some extra fuel. Expectations are for nonfarm payrolls to have slowed to 58k in February from 130k in January, and for the unemployment rate to have held steady at 4.3%. The year-on-year rate of average hourly earnings is forecast to have remained at 3.7%.

Following the better-than-expected ADP private employment report for the month and the improvement in the employment subindices of the ISM PMIs, the risks surrounding today’s official jobs report may be tilted to the upside. Investors are now penciling in 38bps worth of rate cuts and signs of further improvement in the US labor market could take that number lower.

Oil extends rally, gold stays subdued, Stocks slide

At the beginning of February, investors were expecting around 65bps worth of reductions by the Fed, but the war in the Middle East has sent oil prices skyrocketing amid supply concerns due to the closure of the Strait of Hormuz and thereby triggered inflation fears. WTI crude oil surged above $80 per barrel today, while Brent is pushing to surpass yesterday’s high of around $87.

Yet, gold, previously seen as the ultimate safe haven, remains subdued, perhaps surrendering the dollar’s strength and the rally in Treasury yields, which increase the opportunity cost for holding the metal.

That said, the war in Iran could start having a diminishing effect on the US dollar when investors are satisfied that they have priced in the proper rate path based on the current circumstances, which could turn their attention back to gold. With that in mind, the outlook for gold likely remains cautiously positive.

US equities pulled back closed in the red again, with the small-cap index Russell 2000 losing nearly 2% and the VIX rallying more than 12%. US stock futures are pointing to a mild rebound today.

Nonetheless, although Wall Street is showing some signs of resilience to the risk aversion triggered by the war, there are no concrete signs that the conflict will end soon, while pre-war AI-related concerns may have not fully dissipated. Thus, there may be scope for a deeper correction, especially with investors also scaling back their Fed rate cut bets.