Euro pares losses as soft-than-expected US data and Warsh's remarks weigh on the Greenback

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EUR/USD pares some of its losses on Wednesday as softer-than-expected US economic data and remarks from Federal Reserve (Fed) Chair Kevin Warsh weigh on the US Dollar (USD).

EUR/USD pares losses as softer-than-expected US data and Fed Chair Kevin Warsh's remarks weigh on the US Dollar.
Hawkish Fed bets limit the US Dollar's downside ahead of Thursday's US Nonfarm Payrolls report.
Weaker-than-expected Eurozone inflation tempered expectations for additional ECB tightening this year.

EUR/USD pares some of its losses on Wednesday as softer-than-expected US economic data and remarks from Federal Reserve (Fed) Chair Kevin Warsh weigh on the US Dollar (USD).

At the time of writing, the pair is trading around 1.1387 after recovering from an intraday low of 1.1361, though it remains down about 0.30% on the day.

Speaking at the ECB Forum in Sintra on Wednesday, Warsh said, "We're not going to give forward guidance," adding, "We'll chart a new course so we can make better decisions." He also noted that "inflation risks have come down."

On the data front, the ADP Employment Change report showed that private payrolls increased by 98K in June, below market expectations of 113K and down from 122K in May. Meanwhile, the ISM Manufacturing Purchasing Managers Index (PMI) eased to 53.3 in June from 54.0 in May, missing market forecasts of 54.0.

In response, the US Dollar came under modest selling pressure. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trades around 101.34 after retreating from an intraday high of 101.59.

However, Warsh reaffirmed the Fed's commitment to restoring price stability, reinforcing expectations that monetary policy could remain restrictive for longer.

Markets are currently pricing in a 67% probability of a rate hike at the September meeting, according to the CME FedWatch Tool. Attention now turns to Thursday's US Nonfarm Payrolls (NFP) report for fresh clues on the labor market and the Fed's monetary policy outlook.

Earlier in the day, softer-than-expected Eurozone inflation data tempered expectations for another European Central Bank (ECB) rate hike this year, limiting gains in the Euro despite the weaker US Dollar.

Meanwhile, ECB President Christine Lagarde said at the ECB Forum in Sintra that "risks are more broadly balanced than a few weeks ago" and that the Eurozone is "not in stagflation." She added that the ECB "will take necessary steps to contain inflation."

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.