Title: FX Daily: Deteriorating Labor Sentiment Adds Uncertainty Ahead of US Jobs Data
Original article by Francesco Pesole, ING Think, June 6, 2024
The foreign exchange (FX) market remains sensitive to US labor market sentiment, as concerns are mounting ahead of the May Nonfarm Payrolls (NFP) report. A string of weak labor indicators over the past few weeks has caused a shift in pricing expectations around Federal Reserve interest rate cuts, underpinning currency movements globally.
This article is a detailed breakdown and rearticulation of insights originally presented by Francesco Pesole of ING Think, examining key currency pairs, labor data surprises, and how monetary policy expectations are shaping FX performance ahead of major US economic releases.
U.S. Jobs Market: Sentiment Weakens
Investors remain firmly focused on US employment indicators. The JOLTS report (Job Openings and Labor Turnover Survey) earlier this week signaled a decline in job openings, reinforcing fears that the labor market is losing momentum.
Key points:
– The JOLTS report showed April job openings falling to 8.06 million.
– This is below market expectations, marking the lowest reading since February 2021.
– The job openings-to-unemployed ratio is nearing pre-pandemic levels, suggesting waning labor market tightness.
– Markets have interpreted this as evidence the Fed may cut rates sooner than previously expected.
Earlier labor data also contributed to this view. The ADP private payrolls reading came in slightly stronger than estimated but failed to reverse broader market sentiment:
– ADP payrolls rose by 152,000 in May, below April’s revised figure of 188,000.
– The figure remained weaker compared to previous months, confirming a slowing pace of employment growth.
– Initial jobless claims on Thursday remained elevated at 229,000, highlighting persistent softening.
Shift in Fed Rate Expectations
The combination of these indicators has triggered a reassessment of the path of Fed interest rates.
– The market is now pricing in a roughly 75% probability of a rate cut by the September FOMC meeting.
– Odds of two rate cuts in 2024 have increased in recent days.
– Any downside surprise in today’s NFP report could solidify those expectations.
Today’s NFP consensus expectations are:
– Headline job creation of around 180,000
– Average hourly earnings expected to rise 0.3% month-on-month
– Unemployment rate anticipated to remain steady at 3.9%
If these numbers disappoint, particularly if job growth dips below 150,000 or unemployment ticks above 4.0%, the dollar could suffer across the board as rate cut bets intensify.
EUR/USD: Testing the Highs
One of the key beneficiaries of the recent softness in US labor data has been the euro.
– EUR/USD has climbed steadily over the past week, currently holding above 1.0880.
– The euro has gained despite the European Central Bank (ECB) delivering a dovish rate cut on Thursday.
On Thursday, the ECB lowered its key interest rate by 25 basis points, in line with expectations. However, officials emphasized a data-dependent approach for future rate moves.
The ECB flagged mildly higher-than-expected inflation forecasts:
– 2024 inflation is now projected at 2.5%, up from 2.3%
– 2025 inflation revised higher to 2.2% from 2.0%
This modest upward revision suggests slower progress towards the 2.0% inflation target, making aggressive easing less likely.
Market implications:
– Short-term rate differentials between the US and the eurozone are narrowing, lending relative support to EUR/USD.
– The pair could test 1.0950 if today’s NFP report affirms labor market weakness and pushes Fed rate cut expectations even further.
USD/JPY: Awaiting Japanese Monetary Signals
The Japanese yen remains sensitive to both global yield
Read more on EUR/USD trading.