Forex Today: Greenback takes a step back on Monday

Joshua Gibson FXStreet

The US Dollar eased on Monday, giving other currencies a chance to recover some much-needed ground as markets gear up for another US NFP jobs print due at the end of the week.

Here’s what you need to know heading into Tuesday, January 7:

The US Dollar Index (DXY) eased lower, falling back below the 109.00 handle and shedding around two-thirds of one percent. Broad-market risk sentiment is back on the rise, pushing the safe haven USD lower across the board. US Nonfarm Payrolls (NFP) due on Friday will be the week’s key reading, however US ISM Services Purchasing Managers Index(PMI) figures are due on Tuesday.

EUR/USD bidders found the buy button on Monday, bolstering Fiber back into the 1.4000- handle. Preliminary European Harmonized Index of Consumer Prices (HICP) inflation is due early in the European market session on Tuesday, and markets will be looking for a slight uptick in headline inflation figures. However, even a bump in near-term inflation numbers are unlikely to spark much fear or greed in traders, as underlying inflation pressures appear to continue to cool.

GBP/USD caught a similar ride at the outside of the new trading week, gaining seven-tenths of one percent and getting muscled back above the 1.2500 handle. UK economic data remains decidedly limited this week, and Cable will be getting pushed around by overall market sentiment in the Greenback more than anything else.

AUD/USD tried to spark a bullish recovery on Monday, but bidding efforts fizzled, dragging Aussie bids back below the 0.6300 handle after briefly tapping the major technical level. Australian Purchasing Managers Index (PMI) figures improved slightly over the weekend, but it still wasn’t enough to firmly push the AUD off of its recent lows.

Economic Indicator

Harmonized Index of Consumer Prices (YoY)

The Harmonized Index of Consumer Prices (HICP) measures changes in the prices of a representative basket of goods and services in the European Monetary Union. The HICP, released by Eurostat on a monthly basis, is harmonized because the same methodology is used across all member states and their contribution is weighted. The YoY reading compares prices in the reference month to a year earlier. Generally, a high reading is seen as bullish for the Euro (EUR), while a low reading is seen as bearish.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

How does Nonfarm Payrolls affect the US Dollar?

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

How does Nonfarm Payrolls affect Gold?

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.

Author

Joshua Gibson

FXStreet

Joshua joins the FXStreet team as an Economics and Finance double major from Vancouver Island University with twelve years' experience as an independent trader focusing on technical analysis.

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