Forex Today: Post-NFP US Dollar selloff pauses
Here is what you need to know on Monday, August 10:
The US Dollar (USD) holds steady at the beginning of the new week after suffering heavy losses against its major rivals following the disappointing labor market data on Friday. Sentix Investor Confidence data for August will be featured in the European economic calendar on Monday.
The data published by the US Bureau of Labor Statistics showed that Nonfarm Payrolls (NFP) declined by 23K in July, missing the market expectation for an increase of 80K by a wide margin. Moreover, June's increase of 57K was revised lower to 20K. With the immediate reaction, the USD Index came under bearish pressure and touched its lowest level since mid-June near 99.40.
Weaker US jobs data cools Fed hike odds and weighs on the Dollar
Strategists at BNY observe that the latest softness in US labor data has materially shifted market dynamics, noting that “the weaker US labor-market signal has pulled down real-rate expectations, extended the Dollar decline and reopened a window for duration and risk assets.” They highlight that “last Friday’s weak US nonfarm payrolls report – at -23k vs. the expected 80k – and the accompanying downward revisions meaningfully cooled expectations for a Fed hike in September, leaving the market with a less than 50% chance of a hike,” underscoring how the data have tempered front-end rate expectations.
US President Donald Trump said over the weekend that they are "semi-negotiating" with Tehran, adding that they will wait for the economic pressure on Iran to mount. On the other hand, Tehran said that they are not engaging in negotiations with the US and submitted a list of demand for reopening the Strait of Hormuz. Crude Oil prices opened marginally higher and the barrel of West Texas Intermediate (WTI) was last seen trading at around $77, rising 1% on the day.
Gold (XAU/USD) rose more than 7% in the previous week and registered biggest one-week gains since late January. XAU/USD remains in a consolidation phase above $4,300 in the European morning on Monday.
USD/JPY gains traction and recovers toward 158.50 after closing in negative territory on Friday.
EUR/USD advanced to its highest level in seven weeks at 1.1580 on Friday and registered moderate weekly gains. The pair stays relatively quiet in the European morning on Monday and fluctuates at around 1.1550.
GBP/USD holds steady at around 1.3500 after rising nearly 0.3% on Friday.
AUD/USD moves sideways above 0.7050 in the early European session on Monday. In the Asian session on Tuesday, the Reserve Bank of Australia (RBA) will announce monetary policy decisions.
RBA seen on hold but keeping hawkish bias as inflation stays above target
Analysts at Brown Brothers Harriman note that the RBA is “widely expected to keep the policy rate at 4.35% for a second straight meeting” at its Tuesday decision, while maintaining a clear tightening bias. They highlight that the central bank is poised to reiterate that it stands ready to “increasing the cash rate further if needed” as inflation “continues to exceed 3.0%.” BBH add that the forthcoming “RBA’s August Statement on Monetary Policy will shed light on the bank’s inflation and growth outlook,” offering markets a more detailed read on how policymakers balance persistent price pressures against the domestic growth backdrop.
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.