US Dollar Falls on Weak Wage Growth Despite Positive NFP Report

By: Miguel A. Rodriguez

10:46, 09 January 2023

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With a decline in the US dollar, the EUR/USD pair has reclaimed all of the ground lost in recent days and is trading above 1.0600. The US CPI is getting a lot of attention this week. 

The long-awaited US Nonfarm Payrolls data was released on Friday with a stronger headline as the unemployment rate dropped to 3.5%, and nonfarm payrolls came in slightly higher than market expectations. However, the market focused on wage growth figures that were significantly lower.  


Wage growth typically deviates less from forecasts than it did last Friday, leading investors to believe that the Federal Reserve will not be forced to raise interest rates aggressively. It's primarily because the Fed's main concern is that inflation could lead to an inflationary wage spiral, but with this number, these concerns are at least temporarily alleviated. 


Market interest rates, or treasury bond yields, fell significantly due to this data, falling 16 basis points to 3.56% for the 10-year bond. The stock indices experienced a bullish reaction that lasted until Monday's Asian session. After all, the unemployment rate remains abnormally low, indicating an unusually tight labor market. As a result, uncertainty persisted for a while in the face of somewhat contentious employment data.  


The big turnaround came after a terrible ISM services report dropped to 49.6, compared to an expected figure of 55. This forward-looking indicator points to a significant slowdown in the economy in the near future and supports investor optimism about the end of rate hikes.  


Due out this week, the CPI figure for the United States will undoubtedly set the tone for the market in the coming weeks. Low inflation data typically reinforces the market's "dovish" sentiment. The futures markets are currently discounting a rate hike of only 25 basis points at the next Fed meeting with a 75% probability.  


On Friday, the stock indices ended the session up more than 2%, boosted by a drop in market interest rates, which pushed the US dollar lower. With a drop in the US dollar, the EUR/USD pair has regained all of the ground lost in recent days and is trading above the 1.0600 level, resuming the bullish trend of recent weeks and heading towards the next resistance level in the area of 1.0740. 


Sources: Bloomberg, Reuters 


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