EUR/USD Gains after US Jobs Report

The EUR/USD rose on Aug. 1, as market participants involved in forex trading received the latest U.S. jobs figures.

Labor data and Fed speculation

The July jobs data – which fell short of expectations – may have impacted speculation surrounding the future of Federal Reserve stimulus. Many market participants have been scrutinizing the statements of central bank officials to get a better sense of what timeline the financial institution will use to taper bond purchases and raise benchmark interest rates.

While quantitative easing has been reduced greatly since the central bank began purchasing $85 billion worth of securities per month in late 2012, the financial institution has held its benchmark interest rates close to zero for years. Any increase in these borrowing costs could impact the greenback relative to other currencies.

Fed policymakers have stated repeatedly that this timeline will hinge largely on the strength of economic data. More specifically, they have singled out the unemployment rate and inflation as two indicators that will have a key impact on decision making.

As the central bank has turned its eye to the labor market in the U.S., market participants trading assets such as the EUR/USD have followed suit.

EUR/USD rises after jobs data

The pair rose to 1.3434 by 12:01 p.m. in New York as the greenback fell against several currencies, according to Bloomberg. Global market participants involved in forex trading responded to a Labor Department jobs report showing that U.S. employers added 209,000 net positions in July, which lagged the forecasts provided in several polls.

Economists participating in a Bloomberg poll predicted the nation would add 230,000 positions during the month. A Reuters survey provided a similar estimate of 233,000 net jobs.

Jobs data and interest rates

The jobs figures may have helped alleviate concerns that the Fed will soon increase its benchmark borrowing costs, as a stronger report could easily help fuel expectations that the central bank would soon boost rates, the media outlet reported.

It is worth noting that there is far more to the Labor Department report than the number of positions and the unemployment rate, as Fed officials are also interested in the participation rate, according to Bloomberg.

This figure rose slightly in July, increasing to 62.9 from 62.8 in June, which matched the lowest reading since March 1978, the media outlet reported. Michael Woolfolk, a global-markets strategist at Bank of New York Mellon in New York, spoke to the key importance of this metric.

“The market is reacting to the headline number, which came in lower than expectations, but we’re impressed by the upward revision of the prior month, and the improving participation rate,” he told the news source.

Sustained economic improvement

Government officials will also monitor the wage data contained in the monthly Labor Department reports, according to The Wall Street Journal. If economic data continues to improve, it should support the view many hold that the Fed is coming closer to providing the U.S. economy with non-inflationary growth.

At the end of the latest Federal Open Market Committee meeting, central bank policymakers noted that key economic indicators are getting better, the media outlet reported. However, they noted various points where business conditions seemed weak.

“Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter. Labor market conditions improved, with the unemployment rate declining further,” the FOMC statement said. “However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.”

Fed statement on interest rates
As a result of this situation, the FOMC indicated it will probably hold down benchmark borrowing rates for a while after it ends QE.

“The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored,” the document said.

QE continues to drop

At the same time, the central bank indicated that starting in August, it would cut its regimen of monthly bond purchases to $25 billion – consisting of $10 in mortgage-backed securities and $15 billion in Treasury securities – from its prior pace of $35 billion.

At this pace, the Fed is on track to end these bond purchases in October, according to Bloomberg.