Euro edges higher as weak US labor data, lower Oil prices temper Fed hike bets

Euro gains as weaker-than-expected US economic data weigh on the US Dollar.
Falling Oil prices ease inflation concerns on both sides of the Atlantic.
Traders trim September Fed rate-hike expectations ahead of Friday's Nonfarm Payrolls report.

Vishal Chaturvedi FXStreet

EUR/USD trades modestly higher on Wednesday as weaker-than-expected US labor market data and easing energy-driven inflation risks temper Federal Reserve (Fed) rate-hike expectations and weigh on the US Dollar (USD).

At the time of writing, EUR/USD trades around 1.1554, up nearly 0.20% on the day. The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.70.

ADP Employment Change rose by 44K in July, missing expectations of 70K and slowing from 98K in June. The report follows Tuesday’s weaker-than-expected JOLTS Job Openings data.

Meanwhile, the ISM Services Purchasing Managers Index (PMI) edged up to 54.1 in July from 54 in June but fell short of the 54.5 market forecast.

According to the CME FedWatch Tool, traders now price in around a 56% chance of a September rate hike, down from 67% a day earlier. Attention now turns to Friday’s Nonfarm Payrolls (NFP) report for fresh clues about the US labor market.

Strategists at Brown Brothers Harriman highlight that recent communications from the FOMC suggest participants “broadly agree that the labor market is in balance but are more divided over the durability of the inflation threat.” They argue that this divergence on inflation leaves “Fed fund futures more sensitive to inflation than employment data.”

Oil prices remain under pressure as hopes build that the Strait of Hormuz could reopen soon. The United States, Iran and Oman are reportedly close to an interim agreement, with an announcement possible as early as Wednesday.

Lower Oil prices reduce inflation risks, although US inflation is still running above the Fed’s 2% target. Policymakers may therefore maintain a restrictive stance, limiting the US Dollar’s downside.

In the Eurozone, falling Oil prices could reduce the need for another European Central Bank (ECB) rate hike, as the latest inflation data suggest that price pressures are moderating after picking up earlier this year due to the surge in energy costs.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

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.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

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.

How does Nonfarm Payrolls affect the US Dollar?

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.

How does Nonfarm Payrolls affect Gold?

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.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

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.

Author

Vishal Chaturvedi

FXStreet

I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.

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