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May US Nonfarm Payrolls Forecast: NFP expected to grow by 185K, although recent jobs data points to disappointment

  • US Nonfarm Payrolls expected to be 185,000 in May, data points to disappointment.
  • The US jobs report could impact the Federal Reserve’s decision next week.
  • The US Dollar heads into the event on a weak tone, still lacking directional momentum.

The United States (US) will release the May Non-Farm Payrolls (NFP) report on Friday at 12:30 GMT. Ahead of the event, the country released multiple employment-related figures anticipating a weak NFP headline figure.

Additionally, the European Central Bank (ECB) announced its monetary policy decision on Thursday. As widely anticipated, the central bank cut interest rates by 25 basis points (bps) each, with the interest rates on the main refinancing operations, the marginal credit facility and the deposit facility falling to 4.25%, 4.5% and 3.75%, respectively. However, European policymakers issued a rather hawkish statement, limiting the decline of EUR/USD after such an aggressive decision.

What to expect from the next Non-Farm Payrolls report?

The NFP report is expected to show the US economy adding 185,000 new jobs in May, up from the 175,000 gained in April. The unemployment rate is expected to hold steady at 3.9%, while average hourly earnings, a measure of wage inflation, are expected to have increased 0.3% on the month from 0.2% previously. The annual reading is forecast to remain unchanged at 3.9%.

During the week, the US revealed 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 was 8.059 million, down from 8.35 downwardly revised million published in March. Additionally, the Automatic Data Processing (ADP) survey indicated that the private sector created 152,000 new jobs in May, below the 173,000 anticipated by market players and declining from the previous 188,000. More relevant, the ADP report showed that annual salary increased by 5%.

ADP Chief Economist Nela Richardson said: “Job gains and wage growth are slowing as we enter the second half of the year. The labor market is strong, but we are monitoring notable pockets of weakness linked to both producers and consumers.”

Finally, initial jobless claims increased by 229,000 in the week ending May 31, worse than the 220,000 anticipated and above the previous weekly increase of 221,000.

Data released ahead of the NFP report showed that price pressures remain high while the labor market is loosening a bit, not enough to wring the hands of Federal Reserve (Fed) officials.

It is worth remembering that the central bank has a dual mandate of achieving maximum employment and keeping prices stable. However, Fed policymakers have stated that a slowing labor market would help them move away from tight monetary policy.

As for inflation, the latest report on the Personal Consumption Expenditure (PCE) Price Index, the Fed’s favorite inflation gauge, showed it held steady at 2.7% year-over-year in April, according to the Bureau of Economic Analysis ( US BEA) On a monthly basis, the PCE price index rose 0.3%, as expected, although the underlying monthly figure was slightly lower than anticipated, rising 0.2%.

The Federal Open Market Committee (FOMC) is widely anticipated to keep the funds rate unchanged at 5.25% to 5.50%, while speculative interest calls for a rate cut in September at the earliest. The Fed is also expected to begin reducing the pace at which it removes assets from its balance sheet.

How will the US May Non-Farm Payrolls report affect EUR/USD?

Generally speaking, a strong reading coupled with rising wage pressures will be understood as a further delay in interest rate cuts and will result in a firmer US dollar. Conversely, a very disappointing report coupled with a decline in wages may result in an acceleration of the USD’s decline, as the market will understand this as a higher probability of an imminent rate cut.

EUR/USD is trading just below 1.0900 following the ECB’s policy decision and ahead of the NFP release. The pair peaked at 1.0915 in early June, consistently finding sellers at the highs that have been reached above the 1.0900 level since mid-March.

Valeria Bednarik, chief analyst at FXStreet, says: “Market participants seem willing to push EUR/USD higher, but are still undecided. What seems clear is that interest in buying the US dollar is quite limited. From From a technical point of view, the pair needs to break above the 1.0910 region to extend gains, with intermediate resistance around 1.0950 before the 1.1000 price zone. A bearish move seems more difficult as the downside looks more. “Messy, with no clear breakout point to 1.0790. Below the latter, the pair could slide towards 1.0700, although buying on dips seems to be the strategy, and further slides seem unclear.”

Non-Agricultural Payrolls FAQs

Non-farm payrolls (NFP) are part of the monthly employment report from the US Bureau of Labor Statistics. The non-farm payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the agricultural sector.

The nonfarm payrolls figure can influence Federal Reserve decisions by providing a measure of how successfully the Fed is fulfilling its mandate of promoting full employment and 2% inflation.
A relatively high nonfarm payroll figure means that more people are employed, earning more money, and therefore likely spending more. Conversely, a relatively low nonfarm payrolls result could mean that people have difficulty finding work.
The Federal Reserve typically raises interest rates to combat high inflation caused by low unemployment, and lowers them to stimulate a stagnant labor market.

Non-farm payrolls typically have a positive correlation with the US Dollar. This means that when payroll numbers are higher than expected, the Dollar tends to rise and vice versa when they are lower.
The NFP influences the US Dollar through its impact on inflation, monetary policy expectations, and interest rates. A higher NFP usually means that the Federal Reserve will be tighter in its monetary policy, which supports the USD.

Non-farm payrolls usually have a negative correlation with the price of Gold. This means that a higher than expected payroll figure will have a depressive effect on the price of Gold and vice versa.
A higher NFP usually has a positive effect on the value of the USD, and like most major commodities, Gold is priced in US Dollars. Therefore, if the USD gains value, fewer Dollars are needed to buy an ounce of Gold.
Furthermore, higher interest rates (usually aided by a higher NFP) also reduce the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Nonfarm payrolls are just one component within a larger employment report and can be overshadowed by the other components.
Sometimes, when nonfarm payrolls beat forecasts but average weekly earnings are lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the drop in earnings as deflationary.
The Participation Rate and Average Weekly Hours components can also influence the market reaction, but only on rare occasions, such as in the “Great Resignation” or the Global Financial Crisis.

The Fed FAQs

The monetary policy of the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the Federal Reserve’s 2% target, it raises interest rates, raising borrowing costs throughout the economy. This translates into a strengthening of the US Dollar (USD), as it makes the United States a more attractive place for international investors to place their money. When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.

The Federal Reserve (Fed) holds eight meetings a year, in which the Federal Open Market Committee (FOMC) evaluates the economic situation and makes monetary policy decisions. The FOMC is made up of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the regional Reserve banks, who serve for one year on a rotating basis.

In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged 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 of 2008. It involves the Fed printing more dollars and using them to buy high-quality 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 capital of the maturing bonds it has in its portfolio to buy new bonds. It is usually positive for the value of the US Dollar.

Source: Fx Street

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