Forex Today: US Dollar extends weekly gains ahead of key NFP data

Eren Sengezer FXStreet

Here is what you need to know on Friday, January 9:

The US Dollar (USD) continues to outperform its rivals early Friday as investors gear up for key macroeconomic data releases. The US Bureau of Labor Statistics (BLS) will publish the employment report for December, which will feature Nonfarm Payrolls (NFP), Unemployment Rate and wage inflation figures. Additionally, the University of Michigan (UoM) will release the preliminary Consumer Sentiment Index data for January.

The USD Index continued to edge higher and closed the third consecutive day in positive territory on Thursday. The data from the US showed that the trade deficit contracted sharply to $59.1 billion in October from $78.3 billion. Additionally, the Weekly Initial Jobless Claims came in at 208,000, compared to the market expectation of 210,000. Early Friday, the USD Index clings to modest daily gains near 99.00 and rises more than 0.5% for the week. In December, Nonfarm Payrolls are forecast to rise by 60,000 and the Unemployment Rate is expected to decline to 4.5% from 4.6%.

In the early trading hours of the Asian session on Friday, the National Bureau of Statistics of China reported that the annual inflation, as measured by the change in the Consumer Price Index (CPI), rose to 0.8% in December from 0.7% in November. This print came in below the market expectation of 0.9%.

AUD/USD extended its correction from the 15-month high it set near 0.6770 earlier in the week and registered losses for two consecutive days. The pair struggles to gain traction early Friday and trades slightly below 0.6700.

EUR/USD remains under bearish pressure and trades at around 1.1650 in the European morning on Friday. The pair is down about 0.6% since Monday and stays on track to register losses for the second straight week.

Following Monday's rally, GBP/USD reversed its direction and closed in the red for three consecutive days, turning negative for the week. The pair stays below 1.3450 to begin the European session on Friday.

After a downward correction on Wedneday, Gold managed to keep its footing on Thursday and registered small daily gains. XAU/USD stays quiet early Friday and fluctuates above $4,470.

USD/JPY gathers bullish momentum and climbs toward 157.50 on Friday after closing marginally higher on Thursday.

(This story was corrected on January 9 at 07:38 GMT to note that the USD Index clings to modest daily gains near 99.00 early Friday, not Thursday.)

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

Eren Sengezer

FXStreet

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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