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Forex Today: Focus shifts to Nonfarm Payrolls as Middle East tensions remain high

Here is what you need to know on Friday, June 5:

The choppy action in financial markets continue early Friday as investors await the critical employment report from the United States (US), which will feature Nonfarm Payrolls (NFP), Unemployment Rate and wage inflation figures. Statistics Canada will also release labor market data for May later in the day.

US Dollar Price This week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the New Zealand Dollar.

USDEURGBPJPYCADAUDNZDCHF
USD0.15%0.09%0.37%0.60%0.52%1.66%0.84%
EUR-0.15%-0.07%0.20%0.45%0.38%1.53%0.69%
GBP-0.09%0.07%0.30%0.52%0.44%1.60%0.74%
JPY-0.37%-0.20%-0.30%0.27%0.21%1.31%0.47%
CAD-0.60%-0.45%-0.52%-0.27%-0.09%1.04%0.22%
AUD-0.52%-0.38%-0.44%-0.21%0.09%1.15%0.31%
NZD-1.66%-1.53%-1.60%-1.31%-1.04%-1.15%-0.84%
CHF-0.84%-0.69%-0.74%-0.47%-0.22%-0.31%0.84%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).

The US Dollar (USD) struggled to build on its weekly gains on Thursday after the data published by the US Department of Labor showed that weekly Initial Jobless Claims rose to 225K from 212K in the previous week. Nevertheless, the cautious market stance helped the currency hold its ground, with the USD Index ending the day virtually unchanged. In the European morning on Friday, the USD Index trades marginally lower on the day at around 99.30. Meanwhile, US stock index futures trade mixed. As of writing, the S&P Futures and Nasdaq Futures were down 0.6% and 1.2%, respectively, while the Dow Jutures were rising 0.1%. The Unemployment Rate in the US is seen holding steady at 4.3% in May, and the NFP is forecast to rise 85K following the 115K increase reported in April.

Following news of Israel and Lebanon agreeing to renew the ceasefire, Hezbollah said they rejected the decision and Israeli and Hezbollah forces started exchanging strikes. In the meantime, US President Donald Trump noted that they were in the middle of final negotiations to end the war with Iran when the House voted to limit his powers.

EUR/USD edges higher and trades slightly above 1.1630 in the European morning on Friday. The Eurostat will release a revision to the first-quarter Gross Domestic Product (GDP) growth reading.

GBP/USD clings to moderate gains at around 1.3450 in the European session following Thursday's indecisive action.

USD/JPY extends its sideways grind near 160.00 for the second consecutive day on Thursday. Japan’s Finance Minister Satsuki Katayama reiterated early Friday that the authorities are always ready to react suitably as needed on foreign exchange.

Gold (XAU/USD) registered gains on Thursday but failed to stabilize above $4,500. XAU/USD corrects lower toward $4,450 in the European session on Friday.

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.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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