Euro picks up, US Dollar loses ground ahead of US Nonfarm Payrolls figures

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Euro picks up, US Dollar loses ground ahead of US Nonfarm Payrolls figures

EUR/USD steadies near session highs at 1.1650 after bouncing from 1.1594 lows on Thursday.
The Euro has shrugged off an unexpected Eurozone GDP contraction in Q1.
Investors are cutting US Dollar longs ahead of the release of the US Nonfarm Payrolls report.

The Euro (EUR) is going through a solid recovery against the US Dollar (USD) on Friday, and trades at 1.1635 at the time of writing, after hitting session highs at 1.1644. Markets have ignored the unexpected decline in the Eurozone’s Q1 Gross Domestic Product (GDP) and have kept trimming USD long positions, heading into the release of the US Nonfarm Payrolls (NFP) report.

Eurostat revised down the first quarter's Eurozone economic growth to a 0.2% contraction, for the first time in more than three years, from previous estimations of a 0.1% growth, and following a 0.2% advance in the previous quarter. Year-on-year, the Eurozone’s GDP has grown at a 0.3% pace, also revised from the 0.7% increase previously estimated and below the 1.2% growth posted in Q4

Beyond that, Eurozone employment has increased 0.1% in the first three months of the year, in line with the market consensus and down from the 0.2% growth posted in the previous quarter.

These figures do not alter the view that the European Central Bank (ECB) will hike rates next week, but they do cast doubts about the bank’s margin to keep tightening its monetary policy in the coming months.

Investors, however, are focused on the US Nonfarm Payrolls report, due later in the day. The market is forecasting an 85K increase in net jobs in May, below April’s 115K increase but significantly above the 10K average increase seen last year. If these figures are confirmed, they will highlight a robust labour market and strengthen the case for Federal Reserve (Fed) tightening down the road, if inflation remains at high levels.

Economic Indicator

Nonfarm Payrolls

The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.

Why it matters to traders?

America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.

Economic Indicator

Unemployment Rate

The Unemployment Rate, released by the US Bureau of Labor Statistics (BLS), is the percentage of the total civilian labor force that is not in paid employment but is actively seeking employment. The rate is usually higher in recessionary economies compared to economies that are growing. Generally, a decrease in the Unemployment Rate is seen as bullish for the US Dollar (USD), while an increase is seen as bearish. That said, the number by itself usually can't determine the direction of the next market move, as this will also depend on the headline Nonfarm Payroll reading, and the other data in the BLS report.