USD/CHF bounces up and reaches 0.7960 as the US Dollar pares losses

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The US Dollar is trimming some losses during Wednesday’s European trading session as the impact of the US government shutdown wears off.

The US Dollar has bounced up to 0.7960, from session lows at 0.7930,
The Greenback is trimming some losses during the European session, as the dust from the US government shutdown eases.
SNB's Schlegel said that the economy shows moderate growth and that inflation is expected to pick up.

The US Dollar is trimming some losses during Wednesday’s European trading session as the impact of the US government shutdown wears off. The USD/CHF has bounced from session lows at 07930, returning to 0.7960, although it remains relatively far away from last week’s highs above 0.8000.

Investors have been selling the Greenback across the board this week, as the market braced for a US federal government shutdown that finally took place on Wednesday. The differences between Democrats and republicans about government funding have led to the first government closure in 7 years and are threatening to delay the release of Friday’s key Nonfarm Payrolls report.

Weak US employment data keep weighing on the USD

On the macroeconomic front, US JOLTS Openings increased moderately in August, but the lower hiring rate keeps investors' concerns about a cooling labour market intact, and is feeding hopes that the Fed will have to cut rates again later this month.

The focus today is on the US ADP employment report, which, barring exception, is unlikely to alter this view. The US economy is expected to have created 50K jobs in September, below the 54K seen in August and well below last year’s average figures.

In Switzerland, SNB’s president, Martin Schlegel, affirmed that inflation is expected to rise slightly in the coming quarters, while the economy points to moderate growth. This endorses the bank’s will to maintain interest rates on hold for the foreseeable future, and provides some support to the CHF.

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.