Euro gains ground as Israel-Lebanon ceasefire lifts risk appetite

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EUR/USD edges higher on Wednesday as signs of easing tensions in the Middle East reduce safe-haven demand for the US Dollar (USD). At the time of writing, the pair trades around 1.1625, up 0.25% on the day.

EUR/USD gains as easing Middle East tensions weigh on the US Dollar.
Markets welcome the Israel-Lebanon ceasefire, boosting hopes for progress in US-Iran talks.
Markets are fully pricing in an ECB rate hike at next week's monetary policy meeting.

Market sentiment improved after the United States announced a ceasefire agreement between Israel and Lebanon, one of Iran's key demands to end the war. The development raised hopes that US-Iran peace talks could pick up pace after appearing to stall in recent days.

The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, is down 0.20% on the day and trading around 99.34.

However, the two sides remain far apart on several major issues, including Iran's nuclear program, sanctions relief, the release of frozen Iranian assets, and most importantly, the future status of the Strait of Hormuz.

Iran's Foreign Minister Abbas Araghchi said on Wednesday that "no tangible progress has been made," according to Tasnim News Agency.

The lack of progress in the negotiations is helping limit deeper losses in the US Dollar. At the same time, the recent rise in Crude Oil prices has fueled concerns that inflation could remain elevated, strengthening expectations that the Federal Reserve (Fed) may keep interest rates higher for longer. That continues to provide underlying support for the Greenback.

Meanwhile, the Euro (EUR) is struggling to draw meaningful support from growing expectations that the European Central Bank (ECB) could resume raising interest rates as inflation outlook deteriorates. Markets have fully priced in a rate hike at next week's meeting and are expecting at least two additional increases by year-end.

The surge in Oil prices has raised stagflation risks in the Eurozone, which could challenge market expectations for additional ECB rate hikes.

Traders now await Friday's Nonfarm Payrolls (NFP) report for fresh clues on the Fed's monetary policy path. Earlier this week, JOLTS job openings and ADP private payrolls data both came in stronger than expected. However, data released on Thursday showed weekly Initial Jobless Claims rose to 225K from 212K and came in above market expectations of 213K.

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.

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