EUR/USD is trading in a narrow range on Friday as a stronger-than-expected U.S. non-farm payrolls (NFP) report provides support to the US dollar (USD), while the euro (EUR) remains relatively stable amid tender liquidity conditions due to the Good Friday holiday.
At the time of writing, the pair is trading at 1.1534, remaining in the red for a second straight day after hitting a weekly high of 1.1627 on Wednesday. Meanwhile, the US Dollar Index (DXY), which tracks the dollar’s value against a basket of six major currencies, is hovering around the 100 level.
According to data published by the US Bureau of Labor Statistics, in March the American economy created 178,000 jobs. jobs, exceeding expectations at the level of 60 thousand. Data for February was also revised down to show a loss of 133,000. jobs, deeper than the previously reported decline of 92,000. At the same time, the unemployment rate dropped to 4.3% from 4.4%.
Wage growth, however, showed signs of moderation. Average hourly earnings increased by 0.2% m/m in March, below the forecast of 0.3% and decreased from the previous level of 0.4%. Year-over-year, earnings rose 3.5%, beating expectations of 3.7% and slowing from 3.8%.
The data showed that labor market conditions remain generally resilient despite volatile trends in recent months, reinforcing expectations that the Federal Reserve (Fed) has room to keep interest rates unchanged for an extended period of time.
Markets have been largely pricing in bets on interest rate cuts since the outbreak of the US-Israel war with Iran as the risk of oil-led inflation increases, and the latest labor market data supports this view.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two missions: achieving price stability and promoting full employment. The basic tool for achieving these goals is adjusting interest rates. When prices rise too speedy and inflation exceeds the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US dollar (USD) because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or the unemployment rate becomes too high, the Fed may lower interest rates to encourage borrowing, which will negatively impact the dollar.
The Federal Reserve (Fed) holds eight policy meetings a year, during which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. Twelve Fed officials attend the FOMC meeting – seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional reserve bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may apply a policy called quantitative easing (QE). QE is the process by which the Fed significantly increases the flow of credit in a gridlocked financial system. This is an unusual policy measure used during crises or when inflation is extremely low. This was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE tends to weaken the US dollar.
Quantitative Tightening (QT) is the reverse process of QE, in which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest capital from the bonds it holds at maturity to purchase recent bonds. This is usually positive for the value of the US dollar.
