Euro pares gains as traders seek clarity on US-Iran talks, Fed monetary policy
- EUR/USD trades in a narrow range as traders await clarity on US-Iran negotiations.
- Strong US manufacturing data and a stabilizing US Dollar cap the Euro’s upside.
- Upcoming US employment data could shape expectations for the Fed’s next policy move.
EUR/USD trades in a narrow range on Monday as traders await clarity on US-Iran negotiations, while signs of stabilization in the US Dollar following the recent intervention-led weakness cap the Euro’s upside.
At the time of writing, the pair trades around 1.1515 after reaching an intraday high of 1.1558, its highest level since June 17.
US President Donald Trump said over the weekend that he had called off a planned strike on Iran, with negotiations expected to begin on Monday. However, Iranian Foreign Ministry spokesperson Esmaeil Baghaei said Tehran is not currently holding talks with Washington. The conflicting headlines keep geopolitical uncertainty alive and leave market sentiment cautious.
Traders also assess the latest business activity data from both sides of the Atlantic. The US ISM Manufacturing Purchasing Managers’ Index (PMI) rose to 55.6 in July from 53.3 in June, beating expectations of 54.0 and marking its highest reading since May 2022. The sector expanded for a seventh consecutive month following ten months of contraction.
Meanwhile, the Eurozone Manufacturing PMI improved to a three-month high of 51.9 from 51.4 in June, although it fell short of the market forecast of 52.0. The stronger-than-expected US reading offers some support to the US Dollar.
The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 99.84 after rebounding from an intraday low of 99.42, its weakest level since June 15.
Dollar outlook darkens as Fed caution and US-Japan action sap confidence
Economists at DBS argue that “the greenback’s trajectory looks bleak in August after stumbling badly at the end of July,” with a combination of policy and geopolitical factors leaving the Dollar exposed. They highlight “the confluence of a Fed seemingly reluctant to hike, coordinated US-Japan currency interventions, and a cooling geopolitical landscape in the Middle East” as key forces that “keep the USD vulnerable.”
DBS notes that “Fed Chairman Kevin Warsh has unsettled investors who had amassed long USD positions betting on his hawkish credentials.” Instead of signalling that rates may rise, “Warsh used the July 28-29 FOMC meeting to focus on institutional reforms, especially scaling back forward guidance.”
Attention now turns to upcoming US employment data for fresh clues on the Fed’s policy path. The JOLTS Job Openings report is due on Tuesday, followed by ADP Employment Change on Wednesday and Nonfarm Payrolls (NFP) on Friday.
Nonfarm Payrolls FAQs
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.
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.
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.
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.
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.
