The most recent US labour market report has left a mixed bag in place for traders, showing positive flows while setting up worrisome signs. These mixed signals have continued to shape the EUR/USD exchange rate, which is currently trading at a 1.1638 exchange rate. The report pointed towards a weaker NFP headline, while at the same time, setting the stage for a decline in the unemployment rate. Analysts are watching these numbers pretty darn closely. They are especially trying to understand how they can shape future monetary policy from the Federal Reserve (Fed).
Yet the NFP data showed a rosy picture for job growth in the US to be quite the opposite. As it turns out, it was weak for a good reason. This second figure is important because it’s considered the best measure of new jobs coming into the economy, excluding the ag sector. By comparison, the unemployment rate experienced a significant drop, down to 4.4% from 4.6%. This drop wasn’t just larger than the expected 4.5%, but it’s an additional sign of a tightening labour market.
Further, average hourly earnings—the most commonly-used measure of wage growth—increased by 0.3% M/M in December. This jump exceeded market expectations and was a big turnaround from November’s scant 0.1% increase. On a year-over-year basis, earnings growth accelerated to 3.8%, beating analysts’ estimates and indicating that wage pressures are starting to heat up across the economy.
Implications of the Labour Market Data
The ramifications of this good news mixed labour market report are huge for the Federal Reserve’s hawkish monetary policy stance. Here’s what to know about the acute focus the Fed has on inflation and job growth, as the central bank determines its path forward. Signs of lower interest rates aren’t far away. Both could occur if inflation remains below the Fed’s 2% target or if the unemployment rate is forced to increase further.
While today’s report showed a decrease in unemployment, the NFP’s disappointing numbers may prompt the Fed to reconsider its stance on interest rates. Historically, when the Fed lowers interest rates it tends to lead to a weakening of the US dollar. This adjustment greatly improves trading conditions in the foreign exchange markets.
Despite these fluctuations, the Greenback has maintained a firm tone across the board, reflecting investor confidence in the overall resilience of the US economy. All eyes will continue to look toward the Fed for any hints or guidance. They’re curious to hear about realistic policy alternatives when the economy is changing so fundamentally.
The Federal Reserve’s Future Actions
Expectations on the direction of interest rates going forward are reversed. Market participants are concerned with the next Federal Reserve statement. If inflation continues to decline, a rate reduction could be possible. Importantly, even more weakness in the employment figures would help lead to this change as well.
The Fed’s dual mandate is to maximize employment and stabilize prices. As such, any shift in their policy carries tremendous weight for domestic and international markets alike. A move in the other direction – toward lower interest rates – would likely mean a weaker dollar and thus a direct effect on currency pairs like EUR/USD.
Analysts emphasize that today’s report paints a distinctly mixed picture. Still, that doesn’t mean a pivot on monetary policy is right around the corner. Judging by past experience, the Fed will wait for much clearer patterns before moving aggressively to raise or lower interest rates. Economic metrics in coming years will be absolutely crucial to informing these conversations moving forward.
Current Market Reactions
Traders have been forced to completely recalibrate their thinking following the labour market shocker. Their goal is to determine what these changes mean for short-term investments as well as long-term investments. The EUR/USD trading at 1.1638 is a testament that participants are still trying to balance these conflicting signals.
As expectations about interest rates change, these ups and downs in currency values will be sharper. The dynamic between faster wage gains and slower job creation should contribute to more volatility in currency markets.
The ongoing pandemic proves more than ever how important it is to be aware of economic indicators. These indicators are often a major, direct influence on monetary policy decisions. Analysts are hoping to get a first glimpse of these changes in the coming data. Market participants will need to be nimble to adapt to these ongoing changes.