British Pound climbs above 1.3500 after weak US NFP data
- The British Pound strengthens as weak US payrolls weigh on the US Dollar.
- The US economy unexpectedly loses 23K jobs, reducing bets on a September Fed rate hike.
- Lower Oil prices ease inflation concerns ahead of next week’s US CPI report.
The British Pound (GBP) strengthens against the US Dollar (USD) on Friday after a disappointing US Nonfarm Payrolls report prompts traders to scale back bets on Federal Reserve (Fed) interest-rate hikes. At the time of writing, GBP/USD trades around 1.3506, hovering near three-week highs.
The US economy lost 23K jobs in July, well below market expectations for an increase of 80K. June’s gain was also revised sharply lower to 20K from 57K. However, the Unemployment Rate unexpectedly fell to 4.1% from 4.2%.
The weak payroll figures weigh heavily on the Greenback and US Treasury yields. The US Dollar Index (DXY), which tracks the Dollar against six major currencies, trades around 99.50, down nearly 0.45% on the day. Meanwhile, the benchmark 10-year US Treasury yield falls to around 4.60%, about eight basis points below its intraday high of 4.68%.
According to the CME FedWatch Tool, markets now assign around a 42.1% probability to a rate hike at the September meeting, down from 67% a week ago.
The softer labour-market data comes as energy-driven inflation risks also ease following the recent decline in Oil prices. West Texas Intermediate (WTI) trades around $76 per barrel, down nearly 10% this week.
Oil prices fell sharply after Iran and Oman reportedly moved closer to a framework that could temporarily increase shipping through the Strait of Hormuz, although a final announcement has yet to be made.
Traders now look ahead to next week’s US Consumer Price Index (CPI) data for fresh clues on the inflation outlook. Headline CPI is expected to rise 0.1% MoM in July after falling 0.4% in June, while core CPI is forecast to increase 0.2% following an unchanged reading in the previous month.
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.
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