USD Weakens as Euro-Dollar Soars Amid Speculation of Fed Rate Cuts
In a dramatic turn of events, the Euro-dollar currency pair climbed to a notable high of 1.0800, as the USD weakened on Friday. The catalyst for this shift was the latest report from the U.S. Bureau of Labor Statistics, which highlighted a weak labour demand and a deceleration in wage growth for April.
The DXY Index, a measure of the dollar against a basket of major currencies, hit a three-week trough, hovering near 104.50. This decline came as market sentiment received a boost, with investors speculating that the Federal Reserve might ease up on interest rates starting from their September meeting.
The Nonfarm Payrolls (NFP) report, a critical indicator of economic health, revealed that new jobs added in April were a mere 175,000 – significantly below the anticipated 243,000. This figure was also dwarfed by the previous month’s revised count of 315,000. Concurrently, the Unemployment Rate saw a slight uptick to 3.9%, defying expectations and the previous rate of 3.8%.
Moreover, Average Hourly Earnings – a precursor to inflation trends – showed signs of cooling. Wage growth on a monthly basis expanded by just 0.2%, falling short of both estimates and the previous month’s growth rate. Annually, wage growth receded to 3.9%, stirring expectations that the Fed might commence rate reductions sooner rather than later.
This combination of sluggish wage growth and soft labour demand could signal a downturn in consumer spending, potentially alleviating inflationary pressures. Such an outcome would likely be detrimental to the US Dollar and bond yields while concurrently bolstering the EURUSD pair.
The greenback’s position was further weakened by disappointing Q1 nonfarm productivity growth and a less aggressive stance on interest rates from the Fed’s recent monetary policy announcement.
Investors are now keenly awaiting the ISM Services PMI data for April, which will offer additional insights into the labour market and the vitality of the services sector – both crucial factors in the Fed’s interest rate decisions. The Services PMI is expected to show improvement, which could influence market dynamics further.
Following Federal Reserve Chair Jerome Powell’s recent remarks, which struck a slightly less hawkish tone than anticipated, traders have ramped up their bets on a potential rate cut in September. Powell expressed diminishing confidence in inflation decreasing throughout the year and acknowledged the uncertain path ahead.
Across the Atlantic, the European Central Bank is poised to lower interest rates come June, assuming inflation remains in check. The Eurozone economy has shown resilience, expanding by 0.3% in Q1 and surpassing expectations, which bodes well for achieving a “soft landing” as inflation targets are approached.
