Forex Today: US Dollar under pressure as markets reassess Fed outlook
Here is what you need to know on Friday, July 3:
The US Dollar (USD) struggles to stay resilient against its major rivals on the last trading day of the week as investors evaluate the timing of a potential Federal Reserve (Fed) rate hike following the disappointing June employment data. The economic calendar will not feature any high-impact data releases and the trading action is likely to remain subdued heading into the weekend, with the stock and bond markets in the United States (US) remaining closed in observance of the Independence Day holiday.
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 weakest against the New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.57% | -1.21% | -0.59% | -0.16% | -0.76% | -1.25% | -1.06% | |
| EUR | 0.57% | -0.70% | 0.00% | 0.38% | -0.21% | -0.75% | -0.55% | |
| GBP | 1.21% | 0.70% | 0.73% | 1.09% | 0.47% | -0.05% | 0.15% | |
| JPY | 0.59% | 0.00% | -0.73% | 0.42% | -0.19% | -0.58% | -0.50% | |
| CAD | 0.16% | -0.38% | -1.09% | -0.42% | -0.61% | -1.00% | -0.84% | |
| AUD | 0.76% | 0.21% | -0.47% | 0.19% | 0.61% | -0.52% | -0.29% | |
| NZD | 1.25% | 0.75% | 0.05% | 0.58% | 1.00% | 0.52% | 0.18% | |
| CHF | 1.06% | 0.55% | -0.15% | 0.50% | 0.84% | 0.29% | -0.18% |
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 Bureau of Labor Statistics (BLS) reported on Thursday that Nonfarm Payrolls (NFP) rose by 57K in June. This print missed the market expectation for an increase of 110K by a wide margin. Additionally, the BLS noted that the change in total NFP for April was revised down by 31,000, and the change for May was revised down by 43,000. "With these revisions, employment in April and May combined is 74,000 lower than previously reported," the press release read. Although the Unemployment Rate edged lower to 4.2% from 4.3% in May, it was driven by the Labor Force Participation Rate declining to 61.5% from 61.8%.
The USD Index turned south following the weak labor market figures and dropped to its lowest level in two weeks near 100.50 before recovering slightly to end the day deep in the red. Early Friday, the index stays on the back foot and loses more than 0.2% near 100.60. According to the CME FedWatch Tool, markets are currently pricing in a 17% probability of a 25 basis points Fed rate hike in July, compared to about 30% before the release of the US employment data.
Major equity indexes in Asia registered strong gains on Friday as risk mood improved on retreating Fed tightening bets. South Korea's KOSPI gained 6%, while Japan's Nikkei 225 and Hong Kong's Hang Seng both added over 1% on the day.
The Japanese Yen surged against the USD during the European trading hours on Thursday, causing markets to speculate whether there was an intervention in the foreign exchange market. USD/JPY extended its slide in the American session and lost about 1% on the day. Early Friday, the pair continues to stretch lower and was last seen losing about 0.25% on the day at 160.75. Japan’s Finance Minister Satsuki Katayama reiterated on Friday that officials are ready to act appropriately on currency fluctuations, while refusing to comment on specific currency levels.
EUR/USD benefited from the broad USD weakness and rose 0.5% on Thursday. The pair holds its ground in the European morning on Friday and trades slightly above 1.1450.
GBP/USD preserves its bullish momentum after posting strong gains on Thursday and trades above 1.3350. The pair remains on track to end the week with a gain of more than 1%.
Gold (XAU/USD) extends its recovery toward $4,200 and rises more than 1% on Thursday. XAU/USD is up about 2% for the week and looks to snap a four-week losing streak.
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
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.
