Australian Dollar weakens against Japanese Yen following China’s Services PMI data

The Euro (EUR) continued to face pressure against the US Dollar (USD) on Wednesday as the greenback maintained its strength, bolstered by expectations of a hawkish Federal Reserve (Fed) and rising tensions in the Middle East. Nevertheless, weaker-than-anticipated US labour market statistics and a slight decline in US Treasury yields curbed the USD's upward movement.

As of now, the EUR/USD pair trades around 1.1580, a -0.11% decrease for the day. The ADP Employment Change revealed that US private-sector payrolls rose by 38K in August, below the anticipated 47K and the revised July increase of 46K. These figures suggest a slowdown in hiring before the upcoming Nonfarm Payrolls (NFP) report on Friday.

US Treasury yields eased across the spectrum on Wednesday, yet they remain near recent highs, with the 10-year yield trading at approximately 4.78% after briefly reaching 4.81%, its highest since October 2023. The US Dollar Index (DXY), which measures the Dollar's value relative to six other major currencies, is at around 99.74, having hit a two-week peak near 99.87.

New York Federal Reserve President John Williams stated on Wednesday that "yields are rising due to a robust economy and a promising outlook," asserting that this rise isn't solely due to inflation forecasts. Williams also noted a correlation between bond yields and the Middle East conflict. The overall outlook remains favorable for the USD, as traders are raising their stakes that the Fed may hike interest rates as early as September, especially after Fed Chair Kevin Warsh adopted a tougher stance on inflation during the Jackson Hole Symposium last week.

The probability of a rate hike at the September 15-16 meeting is now at around 70%, up from 36% a week ago, according to the CME FedWatch tool. The escalation of hostility between the US and Iran has also bolstered the USD while putting pressure on the Euro. The latest surge in oil prices due to unrest has heightened inflation worries and heightened expectations that central banks might maintain restrictive monetary policy for a longer duration.

This scenario favors the ECB's decision to raise its deposit rate by 25 basis points to 2.50% at its meeting on September 9-10, marking its second increase this year. Upcoming Eurozone data includes preliminary inflation data for August, which indicated that the Harmonized Index of Consumer Prices (HICP) rose to 3.3% YoY from 2.9% in July, further supporting arguments for another rate hike.

Looking ahead, the Eurozone Producer Price Index (PPI) will be released on Thursday, followed by Retail Sales data on Friday. The Nonfarm Payrolls release, scheduled for the first Friday following the reported month, represents the number of new jobs added in the US during the previous month in all non-agricultural businesses. It is published by the US Bureau of Labor Statistics (BLS) and is regarded as one of the most important economic indicators for forex traders.

A high reading typically supports the USD, while a low reading is bearish, although previous months' reviews and the Unemployment Rate also play significant roles. The market's reaction to the BLS report depends on how traders interpret all the data within it. Despite various leading indicators shaping estimates, Nonfarm Payrolls often surprise markets and create substantial price volatility. Actual figures beating consensus tend to be bullish for the USD.