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Strong US labor market data strengthens the US dollar

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Strong US labor market data strengthens the US dollar

The data released today on the U.S. labor market for shows that job growth in June has significantly exceeded forecasts. Even though the other figures did not fully meet expectations, the US dollar has increased significantly as a result.

Significant employment growth in all sectors

After non-farm payrolls in the USA only increased by a disappointing 72,000 jobs in May, a growth of around 160,000 jobs was expected for June. The same applies to private employment in non-farm payrolls, which grew by a weak 83,000 jobs in May and was expected to grow by around 153,000 jobs in June. Equally weak was job growth in the government and manufacturing sector in May. While employment with the government was even down with -11,000 jobs, it grew by a meager 3,000 jobs in manufacturing sector in May. The forecasts for the two sectors were correspondingly cautious. While no forecast was given for the government sector, the expectation of 2,000 new jobs in industry was very weak.

However, the figures released today exceeded analysts' and markets' expectations by far. With an increase of around 224,000 jobs in non-farm payrolls, the forecast was exceeded by around 64,000 jobs or about 40%. The same applies to the other employment areas. Private non-farm payrolls grew by 191,000 jobs, some 38,000 more than forecasted, manufacturing by 17,000 jobs compared to the expected 2,000, and the public sector by 33,000.

The other data from the US labor market did not quite meet the forecasts, but did not show a stronger negative impact on the financial markets. Thus, year-on-year growth in hourly earnings remained at 3.1%, as in the previous month, compared with an expectation of 3.2%, and it even fell to 0.2% on a month-on-month basis, after reaching 0.3% in May, which was also expected for June. The unemployment rate also rose from 3.6% to 3.7%. Only the participation rate of the working age population rose from 62.8% to 62.9%.

US dollar significantly stronger, stock market indices lower

In the Forex market, the U.S. Dollar is trading significantly higher after the release of U.S. labor market data. The EUR/USD pair currently lost around 0.64% and is trading at around 1.1212 USD, and the USD/JPY pair gained around 0.74% and is trading at 108.59 Yen. The British pound lost about 0.73% against the greenback and is currently trading at 1.2485 USD.

The opposite is the situation on the stock markets, where the indices have fallen across the board. The Dow Jones is currently losing around 193 points or 0.71% and the S&P500 is around 0.86% down. Germany's leading index, the DAX, has suffered losses since the start of trading today, but the downward slide has accelerated further according to US data. The DAX is currently down by around 103 points or around 0.83%.

Effects on next Fed meeting and possible rate cut

In the run-up to the Fed's upcoming meeting at the end of July, where market participants expect a rate cut of 25 basis points with virtually absolute certainty and a 0.5% rate cut with little chance, labour market data was probably the most important data for the current month. The fact that they were well above expectations will certainly have a positive impact on the Fed's assessment, but in the end the expected rate cut is still likely to take place. On the one hand, the Fed has to act because of the expectations of the markets, but much more importantly because of the current monetary policy of the central banks of other important economic areas. For example, the ECB is continuing its 0 interest rate policy for the euro zone and has announced further measures if necessary, and a possible easing of monetary policy has also been signalled in China or Australia.

In order to avoid a stronger appreciation of the US dollar and the associated negative impact on the US economy, the Fed will hardly be able to avoid a rate cut at its meeting on 31 July. However, it can be assumed that there will be a maximum cut of 0.25%. Until then, market participants may become more cautious.

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