- US Nonfarm Payrolls are foreseen at 185K in May, data hints at a miss.
- The United States Employment report could impact the Federal Reserve’s decision next week.
- The US Dollar heads into the event with a weak tone, still lacking directional momentum.
The United States (US) will release the May Nonfarm Payrolls (NFP) report on Friday at 12:30 GMT. Ahead of the event, the country released multiple employment-related figures that anticipate a soft NFP headline figure.
Furthermore, the European Central Bank (ECB) announced its decision on monetary policy on Thursday. As widely anticipated, the central bank trimmed interest rates by 25 basis points (bps) each, with the interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility coming down to 4.25%, 4.5%, and 3.75%, respectively. However, European policymakers delivered a quite hawkish statement, limiting EUR/USD slide after such an aggressive decision.
What to expect in the next Nonfarm Payrolls report?
The NFP report is expected to show that the US economy added 185K new jobs in May, above the 175K gained in April. The Unemployment Rate is foreseen stable at 3.9%, while Average Hourly Earnings, a measure of wage inflation, are expected to have ticked up by 0.3% in the month from the previous 0.2%. The annual reading is forecast to remain unchanged at 3.9%.
Throughout the week, the US unveiled the April Job Openings and Labor Turnover Survey (JOLTS), which showed that the number of job openings on the last business day of the month stood at 8.059 million, below the downwardly revised 8.35 million posted in March. Additionally, the Automatic Data Processing (ADP) survey indicated that the private sector created 152K new positions in May, below the 173K anticipated by market players and easing from the previous 188K. More relevant, the ADP report showed annual pay was up 5%.
ADP Chief Economist Nela Richardson said:“Job gains and pay growth are slowing going into the second half of the year. The labor market is solid, but we’re monitoring notable pockets of weakness tied to both producers and consumers.”
Finally, Initial Jobless Claims increased by 229K in the week ending May 31, worse than the 220K anticipated and above the previous weekly raise of 221K.
Data released ahead of the NFP report showed that price pressures remain high while the labor market is loosening a bit, not enough to twist Federal Reserve (Fed) officials’ hands.
It is worth reminding that the central bank has a dual mandate to achieve maximum employment and keep prices stable. However, Fed policymakers have stated that a softening labor market would indeed help them move away from the tight monetary policy.
Regarding inflation, the latest Personal Consumption Expenditures (PCE) Price Index report, the Fed’s favorite inflation gauge, showed it held steady at 2.7% YoY in April, according to the US Bureau of Economic Analysis (BEA). On a monthly basis, the PCE Price index was up 0.3%, as expected, although the core monthly figure was slightly lower than anticipated, up 0.2%.
The Federal Open Market Committee (FOMC) is widely anticipated to keep the funds rate unchanged between 5.25% and 5.50%, while speculative interest foresees a rate cut in September at the earliest. The Fed is also expected to begin tapering the pace at which it rolls off assets from its balance sheet.
How will the US May Nonfarm Payrolls report affect EUR/USD?
Generally speaking, a strong headline reading alongside increased wage pressures will be understood as a further delay in interest rate cuts and result in a firmer US Dollar. On the contrary, a highly disappointing report alongside easing wages may result in the USD accelerating its slump, as the market will understand it as a higher chance of a soon-to-come rate cut.
The EUR/USD pair trades just below 1.0900 following the ECB monetary policy decision and ahead of the NFP release. The pair peaked at 1.0915 early in June, steadily meeting sellers on spikes beyond the 1.0900 level since mid-March.
Valeria Bednarik, FXStreet’s Chief Analyst, states: “Market participants seem willing to push EUR/USD higher, but can’t still make up their minds. What seems clear is that interest in buying the US Dollar is quite limited. From a technical point of view, the pair needs to clear the 1.0910 region to extend gains, with an intermediate resistance at around 1.0950 ahead of the 1.1000 price zone. A bearish movement seems more difficult, giving the downside seems more messy, without a clear breakout point until 1.0790. Below the latter, the pair could slide towards 1.0700, yet buying the dips seems to be the name of the game, and further slides seem unclear.”
Economic Indicator
Nonfarm Payrolls
The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months’ reviews and the Unemployment Rate are as relevant as the headline figure. The market’s reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
