EUR/USD trades firmly near 1.1540 on renewed US labor market risks

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The EUR/USD pair holds onto Thursday’s gains around 1.1540 during the late Asian trading session on Friday. The major currency pair exhibits strength as the US Dollar (USD) faces selling pressure due to renewed United States (US) labor market concerns.

EUR/USD clings to gains around 1.1540 as the US Dollar turns fragile.
Rising US labor market risks have slightly prompted Fed dovish expectations.
ECB’s de Guidos stated that he is comfortable with current interest rates.

At the press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally higher to near 99.80 after gaining temporary support near 99.60.

On Thursday, the US Challenger report showed that employers laid off 153,074 workers in October. The figure was 183% higher from numbers seen in September and 175% higher than the same month a year ago. The report also showed that laborforce reduction was majorly prompted by the rising adaptation of Artificial Intelligence (AI) and cost-cutting by employers.

Signs of cooling job demand have acted as slight drag on market expectations supporting the Federal Reserve (Fed) to hold interest rates steady in the last meeting of the year in December.

The CME FedWatch tool shows that the probability of the Fed to hold interest rates in the 3.50%-3.75% range in the December meeting has diminished to 33% from 38% seen on Wednesday.

Meanwhile, the Euro (EUR) trades broadly calm against its peers as comments from a number of European Central Bank (ECB) officials have signaled that there is no urgency of monetary policy adjustments.

ECB Vice President Luis de Guindos said in webinar on Thursday that he is comfortable with “current level of interest rates”, and is optimistic on services inflation and growth.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

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