EUR/USD trades sideways around 1.1600 as US NFP takes centre stage

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The EUR/USD pair trades in a tight range around 1.1600 during the European trading session on Friday. The major currency pair consolidates as investors await the United States (US) Nonfarm Payrolls (NFP) data for February, which will be published at 13:30 GMT.

EUR/USD remains in a confined range around 1.1600 as investors await the US NFP data.
Traders trimmed Fed’s interest rate cut bets for the July policy meeting after the US ADP Employment data.
ECB’s Lagarde said that the monetary policy is not on a preset course.

As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades flat near 99.00, but is still close to its three-month high of 99.68 posted on Tuesday.

The impact of the US NFP data will be significant on the Federal Reserve’s (Fed) monetary policy outlook as officials have remained concerned over labor market risks.

Economists expect US employers to have hired 59K fresh jobs, significantly lower than 130K in January. The Unemployment Rate is seen as steady at 4.3%. Meanwhile, Average Hourly Earnings, a key measure of wage growth, is estimated to have remained steady at 3.7% Year-on-Year (YoY).

Signs of strong labor demand and higher wage growth would force traders to pare dovish Fed bets further. This week, the speculation for the Fed reducing interest rates in the July policy meeting eased after the release of the ADP Employment Change data on Wednesday, which showed a higher-than-expected addition of fresh workers in February.

According to the CME FedWatch tool, the odds of the Fed holding interest rates steady in the July policy meeting have increased to 47.4% from 33.4% seen a week before.

In the Eurozone, the European Central Bank (ECB) is expected to hold interest rates steady for a longer period despite the ongoing war in the Middle East. ECB President Christine Lagarde said during a Q&A session on Thursday that the “monetary policy is not on a preset course”, and the central bank is carefully monitoring the impact of the war.

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.