**AUD/USD, NZD/USD, and USD/JPY React to Fed Rate Cut Expectations and U.S. Jobs Data Miss**
*By James Hyerczyk | Originally published on FX Empire*
Currency markets were in sharp focus at the end of the previous trading week, as traders parsed weaker-than-expected U.S. employment data and recalibrated expectations for Federal Reserve interest rate cuts. The major forex pairs, notably AUD/USD, NZD/USD, and USD/JPY, showed significant movement as the narrative of stubborn inflation was briefly superseded by signs of a decelerating labor market. The shift in sentiment pushed the U.S. dollar lower and provided a tailwind for risk-sensitive currencies like the Australian and New Zealand dollars.
Let’s take a deeper look at the market drivers behind the moves across these currency pairs and what traders will be watching next.
## Weak U.S. Nonfarm Payrolls Spark Fed Speculation
On Friday, the U.S. Department of Labor released the May Nonfarm Payrolls (NFP) data, which missed market expectations. The report showed that the U.S. economy added 272,000 jobs during the month. While the headline number was stronger than expected, wage growth continued to add to inflationary concerns, and the unemployment rate ticked up to 4.0%, prompting mixed reactions across the market. The jobs data hinted at cooling conditions in the broader labor market, potentially giving the Federal Reserve more room to consider policy easing in the coming months.
Despite the stronger headline jobs number, Wall Street focused on underlying signs of slowing economic momentum. Coupled with Wednesday’s release of weaker-than-expected ISM Services PMI, market sentiment mildly shifted toward expecting the Fed to cut rates as early as September.
Key data highlights from the week included:
– Nonfarm Payrolls (May): +272,000 jobs added (vs. estimates of 190,000)
– Average Hourly Earnings (YoY): +4.1%, indicating persistent wage inflation
– Unemployment Rate: 4.0% (up from 3.9% in April)
– ISM Services PMI: Dropped to 53.8 from a previous 55.0, implying weakening service sector growth
The interest rate futures now show increased expectations for two rate cuts in 2024, with the first one potentially occurring in September. Though inflation remains sticky, the Fed could soon be forced to grapple with dual pressures: cooling job growth and still-elevated price levels.
## Impact on AUD/USD: Tailwind for Australian Dollar
The AUD/USD pair posted gains in reaction to the softer U.S. dollar and growing Fed rate cut bets. The Australian dollar tends to be positively correlated with risk sentiment and commodity strength, and both were moderately supportive. On Friday, AUD/USD rose to a session high near 0.6640, reversing weakness seen earlier in the week when U.S. yield strength pushed the pair lower.
Several factors are helping the Australian dollar:
– Risk-on sentiment fuelled by weaker U.S. data
– Stability in iron ore prices, a key Australian export
– Reduced expectations for additional Reserve Bank of Australia (RBA) tightening
However, the RBA remains largely sidelined due to stubborn inflation. Traders have priced in a lower probability of rate hikes even as inflation remains slightly above the target range. This makes U.S. dollar movement a primary driver for the AUD/USD in the short term.
Technically, AUD/USD is showing increasing signs of bullish momentum. A break above the 0.6660 level could invite further upside with the next resistance near 0.6710.
## NZD/USD Reacts to Fed and Commodities
Similarly, the New Zealand dollar strengthened over the week, supported by the declining dollar and a modest recovery in risk appetite. NZD/USD rose to levels near 0.6140 late in the week, after touching a midweek low near 0.6080. The
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