NZD/USD bounces from two-month low as soft NFP data triggers US Dollar sell-off

• NZD/USD rebounds from a two-month low as markets react to soft labor data.
• US NFP report disappoints as the US economy added only 73K jobs in July, well below the 110K expected.
• The CME FedWatch Tool shows 82% odds of a September rate cut, up from 37% pre-NFP.

The New Zealand Dollar (NZD) recovers from a two-month low on Friday as the US Dollar (USD) weakens broadly following a disappointing July Nonfarm Payrolls (NFP) report. The Kiwi had been under pressure throughout the week but staged a strong rebound after the softer labor data triggered a sharp pullback in the Greenback and boosted expectations of an interest rate cut in September by the Federal Reserve (Fed).

At the time of writing, NZD/USD is trading firmly higher during the American session, hovering around 0.5900, up nearly 0.17% on the day after bouncing from an intraday low of 0.5856. Despite Friday's recovery, the pair remains on track to post a weekly loss. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, has retreated sharply from the two-month high of 100.26 reached earlier in the day, and is now trading near 98.86.

The July NFP report delivered a significant downside surprise, showing the US economy added just 73,000 jobs, well below the 110,000 expected. Adding to the dovish tone, the BLS made substantial downward revisions to previous months' data, with May and June payrolls being revised down by a combined 258,000 jobs. The Unemployment Rate ticked up to 4.2% in July, matching expectations and rising slightly from 4.1% in June. While the increase is modest, the Unemployment Rate has remained confined within a tight 4.0%-4.2% range since May 2024, underscoring a steady but gradually cooling labor market.

Wage growth remained steady, with Average Hourly Earnings rising 0.3% month-on-month and 3.9% year-on-year, offering mixed signals on underlying inflation pressures. In the manufacturing sector, the S&P Global Manufacturing Purchasing Managers Index (PMI) rose slightly to 49.8 in July, beating expectations of 49.7 and improving from 49.5 previously. However, the more closely watched ISM Manufacturing PMI fell short of forecasts, dropping to 48.0 in July from 49.0 in June, signaling ongoing contraction in factory activity.

US consumer sentiment also softened in July, adding to the cautious economic tone. The Michigan Consumer Sentiment Index slipped to 61.7, slightly below the expected 62.0 and down from 61.8 previously. Meanwhile, the Consumer Expectations Index declined to 57.7, missing the 58.6 forecast.

According to the CME FedWatch Tool, markets are now pricing in an 82% probability of a rate cut at the Federal Reserve's September meeting, a sharp jump from just 37% prior to the NFP release. However, Fed officials have maintained a cautious tone despite the data-driven shift in market expectations. Fed's Hammack noted that monetary policy remains "a little bit restrictive" but "not far from neutral," emphasizing that "a lot more data" will be considered before the September FOMC meeting. Meanwhile, Fed's Bostic reiterated his base case for one rate cut this year but signaled flexibility, saying he's "open to changing his view if the data supports it."