EUR/USD softens with markets trimming bets for Fed rate cuts
- EUR/USD hits session lows at 1.1860 after rejection at the 1.1925 area.
- Strong US Nonfarm Payrolls provided a moderate boost to the US Dollar.
- On Thursday, the focus will be on the speeches from ECB officials.
The Euro (EUR) is practically flat against tht the US Dollar (USD) on Thursday, trading at 1.1860 at the time of writing, after failing to extend above the 1.1925 area earlier this week. A strong US Nonfarm Payrolls (NFP) report on Wednesday has prompted investors to pare back hopes of immediate interest rate cuts by the US Federal Reserve and provided some foothold for the US Dollar.
January's delayed US NFP report showed a 130K increase in net employment, almost twice the 70K forecasted by market analysts, and the Unemployment Rate declined to 4.3% from 4.4% in the previous month.
An excessive concentration of employment creation, with the healthcare sector accounting for nearly two-thirds of January's payrolls and a sharp downward revision to 2025 figures, somewhat tempered investors' optimism. Wednesday's data, however, has eased concerns about the health of the US labour market, triggered by the downbeat ADP Employment Change and JOLTS Job Openings released last week.
Fed interest rates likely to be steady until June
Futures markets have scaled back bets of Fed rate cuts in the coming months following the NFP report. The odds for monetary easing in March have dropped to 5% from 20% pre-NFP, and the chances of a rate cut in April have dropped to 20% from above 40%, according to the CME's Fed Watch Tool. Investors still see a 60% chance of an easing move in June, the first monetary policy meeting with Kevin Warsh in the central bank's chair.
In the economic calendar on Thursday, the focus will be on the speeches of European Central Bank Board members, Piero Cipollone, Philip Lane, and Bundesbank President Joachim Nagel.
In the US, Initial Jobless Claims and Home Sales figures might provide some distraction, although traders might remain cautious ahead of Friday's Consumer Prices Index, for a more complete assessment of the Fed's monetary policy path.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
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