Euro hits a nine-day high after softer-than-expected US NFP
- EUR/USD climbs to a nine-day high after weak US Nonfarm Payrolls weigh on the US Dollar.
- Soft US jobs data prompts traders to trim September Fed rate hike bets.
- Softer-than-expected Eurozone inflation clouds the outlook for another ECB rate hike.
The Euro (EUR) gains against the US Dollar (USD) on Thursday after weaker-than-expected US Nonfarm Payrolls (NFP) data reduced expectations of an imminent Federal Reserve (Fed) rate hike.
At the time of writing, EUR/USD trades around 1.1444, hitting a nine-day high and up about 0.60% on the day.
Data released by the US Bureau of Labor Statistics (BLS) showed the US economy added 57K jobs in June, falling well short of expectations for 110K. Meanwhile, May's payrolls were revised down to 126K from the previously reported 172K.
The Unemployment Rate unexpectedly eased to 4.2% from 4.3%, while Average Hourly Earnings rose 0.3% MoM and 3.5% YoY in June, in line with market expectations.
Following the data, traders trimmed September Fed rate hike bets, with the probability of a rate increase falling to 51% from 63%, according to the CME FedWatch Tool.
The US Dollar was already under pressure earlier in the day amid speculation that Japanese authorities may have intervened in the foreign exchange market after USD/JPY climbed to a 40-year high earlier this week. Selling intensified following the weak NFP print, sending the US Dollar Index (DXY) to a two-week low of around 100.70.
However, the US Dollar's downside may remain limited as the weak employment report did little to change the Fed's hawkish narrative. With inflation still running well above the central bank's 2% target, traders continue to expect the Fed could raise interest rates later this year.
San Francisco Fed President Mary Daly said on Thursday, "It's possible we may have to fight more persistent inflation." She also said, "Oil prices have come down, we hope for relief," adding, "That should help inflation come down."
Meanwhile, softer-than-expected Eurozone inflation data released on Wednesday has cast doubt on the likelihood of another European Central Bank (ECB) rate hike this year.
Against this backdrop, the path of least resistance for EUR/USD may remain to the downside unless the Fed adopts a less hawkish policy stance.
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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