This week, the global foreign exchange market has been experiencing frequent fluctuations, and investors are focusing on the US employment data for August and the meeting scheduled by the Federal Reserve on September 17-18. Despite the Federal Reserve's hint of a possible interest rate cut, the August non-farm employment report in the United States performed poorly, failing to provide clear guidance. This has led to significant divergences in the expected magnitude of the interest rate cut in the market, and has also had a significant impact on the trends of major currencies such as the US dollar, euro, and yen.

The US dollar is fluctuating and slightly higher.

As of Friday, September 6, the US dollar rose slightly in volatile trading, with the US dollar index rising to 101.21, up 0.2% from the previous day. Data released by the U.S. Bureau of Labor Statistics showed that non-farm payrolls increased by 0.142 million in August, lower than the market's expectation of 0.16 million, while July's employment data was sharply revised down to 0.089 million. However, despite the slowdown in job growth, the unemployment rate remains at a low level of 4.2%, indicating a gradual cooling of the labor market.

These data have sparked heated debates over the extent of the interest rate cut by the Federal Reserve this month. Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, said, "This jobs report provides support for a 25 basis-point rate cut and also provides a basis for a 50 basis-point rate cut." Currently, according to the Chicago Mercantile Exchange (CME)'s "FedWatch" tool, the market believes that there is a 69% probability of a 25 basis-point rate cut by the Federal Reserve and a 31% probability of a 50 basis-point rate cut.

Data from the London Stock Exchange Group shows that market expectations have changed significantly after the release of employment data. Previously, the market believed that the probability of a 50 basis-point rate cut was higher, close to 43%. Now, a more conservative forecast of a 25 basis-point rate cut is dominant.

The euro is under pressure, while the British pound is weak.

The euro against the US dollar (EUR/USD) showed violent fluctuations after the release of the employment report, rising to $1.1155 at one point during the session, but quickly fell back and eventually dropped by 0.3% to $1.1082. The decline in the euro is mainly due to the strength of the US dollar and the uncertainty surrounding the European Central Bank's policy outlook. The ECB will hold a meeting next week, and although the market generally expects the central bank to maintain the current interest rates, dovish monetary policy signals could further pressure the euro.

The British pound against the US dollar (GBP/USD) also continued its weak trend, falling by about 0.4% this week to close at $1.3131. The Bank of England will hold a monetary policy meeting in two weeks, with the current market expectation of a small likelihood of a rate cut, but the possibility of a 25 basis point cut in November has already been fully priced in. Despite some signs of weakness in the UK economy, the Bank of England still faces significant inflationary pressures, putting it in a dilemma when making decisions.

The yen gains safe-haven support.

The yen against the US dollar (USD/JPY) rose for the fourth consecutive trading day this week, closing at 142.42 yen on Friday, a gain of 0.7%. The yen's strength is mainly due to the drive for safe-haven demand and market expectations of the Bank of Japan adjusting its monetary policy.

With increased global economic uncertainty, investors are starting to seek safe-haven assets. The yen, as a traditional safe-haven currency, has been favored by investors. In addition, the Bank of Japan may relax its long-standing ultra-loose policy, which has also supported the yen's rebound to a certain extent.

Karl Schamotta, Chief Market Strategist at Corpay, said: 'With the possibility of a downturn in the US economy in the coming months, selling pressure on the US dollar will increase, providing upward potential for the yen.' However, he also pointed out that the specific actions of the Bank of Japan are still pending, and whether the yen's strong trend can continue depends on further changes in global risk sentiment.

The market focus has shifted to the expectations of a Fed rate cut.

The statements of Federal Reserve policymakers continue to dominate market sentiment. New York Fed President Williams and Fed Governor Wall clearly stated this week that the Fed is prepared to initiate a series of rate cuts at the September meeting to address the risks of cooling labor markets and economic slowdown. Wall even emphasized in his speech at Notre Dame University that if future data continues to deteriorate, the Fed may take more aggressive rate cut measures.

He said: "If the data suggests that it is necessary, we can take larger rate cut measures at once, just like we raised rates significantly in 2022 to address inflation." Chicago Fed President Gulzad also stated in an interview that the data in the coming months will be crucial in determining the policy direction.

As the September Fed meeting approaches, there is still a significant difference of opinion in the market regarding the extent of the rate cut. Raymond James' Chief Economist Eugenio Aleman believes that the Fed will take a cautious stance, and the likelihood of a 50 basis point rate cut is not high, as this may send overly pessimistic signals to the market. He pointed out: "The Fed does not want the market to mistakenly think that the U.S. economy is on the brink of collapse."

Outlook on the currency market: Can the U.S. Dollar continue to strengthen?

Looking ahead to next week, the focus of the global foreign exchange market will still be on the Fed's policy direction and the upcoming U.S. inflation data. The August CPI data will be released next week, and this data is expected to provide further guidance on the Fed's monetary policy.

If the CPI data unexpectedly rises, the U.S. Dollar may continue to be supported in the short term. However, if the data shows a relief in inflation pressures, expectations of a Fed rate cut will further increase, and the U.S. Dollar may come under pressure.

Overall, currency market volatility will intensify with the increasing global economic uncertainty. Investors should closely monitor the statements of Fed officials, the release of economic data, and changes in market sentiment to address potential market fluctuations in the future.