In the past, data from the US labor market has been able to bring elevated volatility to the currency market. This volatility before the pandemic seemed much lower than years before. Now, however, we may return to significant changes due to expectations of Fed action.
NFP (nonfarm payroll) is data that shows the total number of paid full-time jobs in the United States excluding those employed on farms (nonfarm), by government agencies or private households. The data is published once a month and is usually the first Friday of the month. This indicator is prepared by the U.S. Department of Labor as part of a comprehensive report on the state of the labor market. Interpretation of the data could be as follows: an increase in employment could mean that companies are expanding, creating new jobs, and the newly hired people have money to spend on goods and services, fueling economic growth. The opposite may be true if employment declines.
The publication is potentially important for financial markets, as decisions by the U.S. Federal Reserve may depend to some extent on it. The Fed, in its mandate, has a duty of care to both price stability and the labor market. At the moment we may be in now, with inflation at its highest level in decades, the Fed is trying to dampen it by raising rates, which at the same time may cool the economy. The open question is whether the cooling will have an impact on the labor market, and if so, how significant will the impact be?
In theory: the less macroeconomic data show signs of deterioration in the U.S. labor market, the higher the probability for greater monetary tightening by the Federal Reserve may be. It seems that the worst moment would be if inflation still remained high and the labor market situation began to deteriorate. Then the Fed's decisions could be more complicated, because on the one hand it is necessary to care about price stability and on the other hand about the labor market. The 1980s in the U.S. showed that fighting inflation was chosen then as the lesser evil, leading to a deep recession. Let's hope it doesn't have to be that way this time.
This morning, the rate of the main currency pair EUR/USD is below parity, having earlier tested potential support at 0.9909 four times. Resistance, on the other hand, could be around 1.0055. Perhaps, after today's US data reading, either of these barriers will be broken.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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