Federal Reserve: Labour strength supports further hikes – Nordea

Nordea analysts Eek-Nielsen and von Gerich anticipate three more Federal Reserve rate hikes to bring inflation in line with targets. They emphasize falling unemployment, a constrained labor supply, and rising core PCE and service price inflation as key contributors. Wage pressures and higher goods prices may further justify additional policy tightening.

The rate decision will ultimately hinge on unemployment and inflation levels. According to June meeting minutes, participants indicated that "almost all" would support policy firming in the face of a stable labor market and persistent inflation. Strong job growth could quickly drive unemployment down, particularly with weak labor supply growth.

The analysis suggests a stable, if not strengthening, labor market as expected by FOMC members. Wage pressure and stronger service price inflation may also emerge. Additionally, GBP/USD reached new three-month highs near 1.3560, driven by increasing selling pressure on the Greenback. EUR/USD also made a significant move, reaching the upper 1.1500s for the first time since mid-June, fueled by a notable retreat in the US Dollar and despite Middle East uncertainties.

Gold rebounded to the $4,400 mark as weak US Dollar sentiment and easing expectations of an imminent Fed rate hike took hold. July's inflation data aligned with expectations, with a 0.1% monthly increase in headline CPI and 0.2% excluding food and energy. Annual headline inflation remains high at 3.4%, causing wage earners to face stagnant spending power, and core inflation is higher than the 2% target.