Euro drops to two-month low as strong US jobs data lifts Greenback

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EUR/USD weakens on Friday as the US Dollar (USD) rallies following a stronger-than-expected US Nonfarm Payrolls (NFP) report. At the time of writing, the pair trades around 1.1559, slipping to two-month lows.

EUR/USD falls to a two-month low after US payrolls beat expectations.
The US economy added 172K jobs in May, while April payrolls were revised sharply higher.
Slowing Eurozone economic growth raises stagflation concerns ahead of the ECB monetary policy meeting on June 11.

Data released by the US Bureau of Labor Statistics showed the economy added 172K jobs in May, well above the market consensus of 85K. April's payroll figures were revised higher to 179K from 115K, while the Unemployment Rate held steady at 4.3%.

In response to the data, the US Dollar Index (DXY) climbed to its highest level since April 7. The index, which tracks the Greenback's value against a basket of six major currencies, trades around 99.80 after rebounding from an intraday low of 99.16 touched earlier in the European session.

The stronger-than-expected labor market data reinforced expectations that the Federal Reserve (Fed) could maintain a restrictive policy stance as officials assess rising inflation risks linked to higher Oil prices. According to the CME FedWatch Tool, traders expect the US central bank to keep rates in the 3.50%-3.75% range over the coming months, while pricing in a 42% chance of a 25-basis-point (bps) rate hike by the December meeting.

The hawkish repricing is also pushing US Treasury yields higher, providing additional support for the Greenback. The benchmark 10-year US Treasury yield jumps 8 basis points (bps) to 4.53% on Friday.

In the Eurozone, traders are nearly certain that the European Central Bank (ECB) will raise interest rates at next week's meeting as policymakers seek to contain inflationary pressures stemming from elevated Oil prices.

However, recent GDP data suggests economic growth is slowing across the bloc. With Europe heavily reliant on imported energy, the ECB may face a difficult trade-off between fighting inflation and supporting growth as stagflation builds.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.