Title: US Dollar Weakens Further Amid Ongoing Post-NFP Fallout
Author: Adapted from InvestingLive’s original article by Tyrone Clarke
As the forex markets continue to digest the latest Non-Farm Payroll (NFP) data, the US dollar has come under persistent pressure. The data, which was weaker than expected, has triggered a shift in market sentiment regarding the direction of Federal Reserve policy. The greenback has declined over the week, amplifying underlying concerns about short-term economic softness and fueling expectations that the Federal Reserve may consider cutting interest rates sooner than projected.
The NFP report showed a slowdown in job creation, which investors interpreted as an early sign of a cooling labor market. This has further deteriorated the dollar’s performance relative to other major currencies like the euro, yen, and British pound. Here’s a deeper dive into the fundamental backdrop affecting the dollar, reactions in key currency pairs, and the broader implications for forex traders in the near term.
US NFP Shock Dents Dollar Sentiment
The Non-Farm Payroll report, released last Friday, indicated the US economy added fewer jobs than anticipated. While one weak data point doesn’t immediately change the fundamentals of an economy, the surprise underperformance has significantly impacted market positioning.
Key takeaways from the NFP report:
– Non-farm employment increased by 187,000 jobs in the latest month.
– However, this figure missed consensus forecasts that projected an addition of 200,000 jobs or more.
– The unemployment rate edged higher to 3.8 percent, compared to expectations of a steady 3.5 percent.
– Average hourly earnings, another inflation proxy, rose by 0.2 percent, below the forecast of 0.3 percent.
The combination of slower job creation, a slight uptick in the jobless rate, and reduced wage pressures contributed to growing speculation that the strong labor market narrative may be weakening. This shift in tone has pulled down U.S. Treasury yields and underpinned a broad-based sell-off of the dollar.
Recalibrated Fed Expectations
Market participants have quickly adjusted their expectations for future Federal Reserve actions due to the softer jobs report. Previously, Fed Chair Jerome Powell had signaled a data-dependent approach to future interest rate moves. However, markets widely interpreted the latest data as supportive of a more dovish stance.
Consequences for Fed outlook:
– Fed funds futures are now pricing in a lower probability of another rate hike this year.
– Short-term interest rate derivatives show a growing expectation of a rate cut by mid-2025.
– Some analysts are betting that the Fed may begin cutting rates even as early as the first quarter of next year if economic data continues to soften.
This rapid shift in expectations has significantly impacted the dollar, especially against currencies where central banks are still battling persistent inflation and signaling potential tightening cycles.
Performance of Major Pairs
EUR/USD
– The euro posted solid gains against the dollar, reaching highs last seen several weeks ago.
– Eurozone inflation readings came in relatively hot, with core inflation showing signs of persistence in certain sectors.
– The European Central Bank (ECB) has maintained its rhetoric on fighting inflation and may still consider further rate hikes depending on upcoming data.
Due to the divergence in central bank policy, the euro has found strong support and looks likely to maintain its upward trajectory if U.S. macroeconomic data weakens further.
USD/JPY
– The dollar fell against the yen as risk-off flows increased and U.S. yields declined.
– The Bank of Japan has remained dovish, but the yen has benefited from unwinding of carry trades.
– With lower Treasury yields reducing the appeal of shorting the yen, Japanese currency strength could persist in the near term.
GBP/USD
– The British pound also benefited from the widespread U.S. dollar sell-off.
– The UK economy continues to show signs of underlying inflation pressures, leading markets to believe that the Bank of England is not yet finished with its rate hikes.
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Read more on EUR/USD trading.