Swiss Franc appreciates against US Dollar as traders await US Nonfarm Payrolls data

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USD/CHF retreats to levels below 0.7880, after hitting eight-week highs, at 0.7927 earlier this week.
The US Dollar trims recent gains as investors brace for the US Nonfarm Payrolls report.
Growing tensions in Lebanon push back hopes of a peace deal between the US and Iran and keep US Dollar losses limited.

The Swiss Franc (CHF) extends gains against the US Dollar (USD) for the second consecutive day on Friday, with the USD/CHF pair hitting session lows at 0.7872 so far, down from nearly two-month highs at 0.7927 earlier in the week.

The Swissie is drawing some support from a moderate US Dollar weakness, as investors trim their USD long positions, ahead of the all-important US Nonfarm Payrolls (NFP) report, due later on Friday.

Market analysts anticipate an 85K increase in net jobs in May, figures significantly below April’s 115K increase yet still consistent with a solid labour market, especially compared with the 10K average seen last year. The NFP report comes after a string of upbeat manufacturing and services activity numbers seen earlier in the week, and, if confirmed, will endorse the view that the Federal Reserve might be forced to hike rates later this year if price pressures remain high.

On the geopolitical front, the ceasefire between Israel and Lebanon has been refused by the Hezbollah group, and the Israeli army has continued to hit targets in the country. This is dampening hopes of any breakthrough in the US-Iran peace process and is likely to provide support to the safe-haven US Dollar.

In Switzerland, the calendar is thin on Friday. Data released on Thursday revealed that consumer inflation remained steady in May, against market expectations of a moderate uptick, which strengthens the case for a steady Swiss National Bank (SNB) monetary policy for the foreseeable future.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

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