- FX traders are paring back their USD short positions ahead of the US NFP release.
- US Nonfarm Payrolls are expected to show a 130,000 increase in May.
- A weaker-than-expected reading might heighten hopes of Fed easing and send the USD lower.
The Australian Dollar extends losses below 0.6500 on Friday as traders trim their US Dollar short positions ahead of the US Nonfarm Payrolls report. The pair’s broader trend remains positive, but the double top at 0.6530 hints at a strong resistance area.
All eyes today are on the US Nonfarm payrolls report, which will be observed with particular interest, after a string of negative US releases earlier this week revived fears of a recession.
Market forecasts anticipate a 130,000 increment on private employment in May, following a 177,000 rise in April, with the Unemployment Rate steady at the previous 4.2% level.
Downbeat NFP figures might boost hopes of Fed easing
Earlier this week, ADP Employment figures showed a much lower than expected reading, 37k against the 115K expected. Beyond that, Manufacturing activity contracted beyond forecasts and, unexpectedly, the Services sector showed a similar picture. After these figures, markets are wondering whether a 130K increase in Payrolls is not too optimistic a view.
Another weak release today will increase concerns about the US economic momentum and might convince the Fed to abandon its neutral stance and lower interest rates further to avoid a deeper economic slowdown. This might add pressure on the USD.
The Australian calendar has been light today, although the impact of a softer-than-expected Australian GDP and the RBA’s dovish minutes has been minimal, with US economic data and Trump’s ongoing tariff saga as the main market movers this week.
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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