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USD weakens on poor NFP data, slower wage growth

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The Euro-dollar currency pair soared to 1.0800 as the USD weakened Friday, with the greenback facing an intense sell-off as the U.S. Bureau of Labor Statistics reported weak labour demand and slowing wage growth in April.

The DXY Index, which tracks the dollar’s value against six major currencies, printed a fresh three-week low near 104.50.

Market sentiment has improved significantly as the weak nonfarm payrolls (NFP) report will provide speculation for the Federal Reserve to reduce interest rates from the September meeting.

The NFP report has shown that fresh payrolls were at 175,000, significantly lower than the consensus of 243,000 and the former reading of 315,000, upwardly revised from 303,000.

The Unemployment Rate rose to 3.9%, against the consensus and the prior reading of 3.8%.  The Average Hourly Earnings data, which will provide fresh clues about the inflation outlook, softened in April.

Monthly wage growth grew at a slower pace of 0.2% from the estimates and the prior reading of 0.3%. In the same period, annual wage growth dipped to 3.9%, against the consensus of 4.0% and March’s reading of 4.1%. This will boost expectations for the Fed, reducing rates early.

Generally, slower wage growth and weak labour demand result in poor consumer spending momentum, which indicates that inflationary pressures could ease.

This situation would be unfavorable for the US Dollar and bond yields, and would likely strengthen the EURUSD pair, as it would allow the Fed to roll back its restrictive interest rate framework.

The US Dollar was already on the back foot due to weak Q1 nonfarm productivity growth, and less hawkish guidance on interest rates than feared by the Fed in its monetary policy statement on Wednesday.

Meanwhile, investors await the ISM Services Purchasing Managers Index (PMI) data for April. The US economic indicator will provide fresh cues about the state of the labour market and the health of the services sector, two key elements that the Fed takes into account when deciding on interest rates.

Services PMI data, a survey that gauges the performance in the services sector, which accounts for two-thirds of the economy is seen improving to 52.0 from the prior reading of 51.4.

Investors will also focus on subcomponents like the New Orders Index and Prices Paid Index, which will reflect the status of new business and service price inflation, respectively.

Recently, traders increased their bets in favour of the Fed starting to reduce interest rates in the September meeting. These bets were boosted after Fed Chair Jerome Powell sounded slightly less hawkish than expected in the latest monetary policy statement and the press conference.

Powell said that his forecast remained for inflation to fall over the course of the year, but that, “my confidence in that is lower than it was.” He also acknowledged that inflation “is still too high,” adding that “further progress in bringing it down is not assured and the path forward is uncertain”, Reuters reported.

On the Eurozone front, the European Central Bank is widely expected to reduce interest rates in June provided there isn’t any surprise with inflation as price growth in the Eurozone is on course to return to the desired rate of 2%. The expectations for the ECB achieving a “soft landing” have improved as the old continent’s economy expanded by 0.3% in the first quarter of this year, outperforming the consensus of 0.1%.

(Source: OANDA)