Investing.com -- EUR/USD retreated from three-month highs on Friday while halting a four-day winning streak, as a relatively strong U.S. jobs report shifted market expectations for the Federal Reserve's next interest rate hike into 2016.
The currency pair traded between 1.1109 and 1.1246 before settling at 1.1159, down 0.0048 or 0.43% on the session. Previously, EUR/USD surged more than 2.5% since Wednesday completing its strongest two-day rally since the August flash crash. After falling approximately 10% against its U.S. counterpart in 2015, the euro is now up nearly 3% versus the dollar over the first five weeks of the year.
EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.
On Friday morning, the U.S. Department of Labor said nonfarm payrolls increased by 151,000 in January, falling considerably from a downwardly revised 262,000 in December. The sharp declines were blamed in large part to unseasonably warm temperatures over the previous month, which created an unanticipated demand for labor in the construction industry. After two months of robust gains, the headline dipped under 200,000 for the first time since September.
The unemployment rate, meanwhile, inched down 0.1% to 4.9%, falling to its lowest level since February, 2008. The U-6 unemployment rate, a broader gauge of the national employment situation, remained unchanged at 9.9%, one-tenth above its November low when it fell its lowest level since May, 2008. The reading, which measures the total level of unemployed workers plus those marginally attached to the labor force, stood at 11.1% last October. The indicator also accounts for workers who are no longer looking for a job, but have looked for one over the last 12 months.
By comparison, the alternative measure of underemployment peaked at 18% in January, 2010, as the nation continued to recover from the Financial Crisis. The U-6 rate is a preferred measure of unemployment by Fed chair Janet Yellen as she assesses the strength of the U.S. labor market.
The strength in the report lies in the average wages category where hourly earnings jumped by 0.5%, amid major increases in state minimum wage floors in numerous regions throughout the country. On an annual basis, wages are up by 2.5% from their January, 2015 level.
An increase in wage-push inflation could be viewed as a signal from the Fed that prices throughout the economy are ready to move upward. Last month, Core PCE inflation came in at 1.4%, significantly below the U.S. central bank's targeted objective of 2%. The Core PCE Index, which strips out volatile food and energy prices, is the Fed's preferred gauge for inflation.
As sluggish inflation remains low, the Fed is wary of potentially triggering a deflationary spiral by approving further rate hikes. In December, the Federal Open Market Committee (FOMC) abandoned a seven-year zero interest rate policy by raising short-term interest rates for the first time in nearly a decade. While the Fed had signaled that it could hike rates as much as four times this year, the U.S. central bank indicated last month that it could proceed more gradually if the global economy continued to struggle and long-term inflation projections remained far below its target.
Following the release, the CME Group's (O:CME) Fed Watch lowered the probability that the FOMC will leave interest rates unchanged this year to 56.6%. A day earlier, investors believed there was a 66.1% chance the Fed would not approve a single rate hike in 2016.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, gained more than 0.60% to an intraday high of 97.29. Previously, the index had slumped over 3% this week as investors braced for a disappointing employment report. The dollar was on pace for its worst week since 2009, before Friday's rebound.
Major central banks have several weeks to examine incoming global data before the European Central Bank holds its next monetary policy meeting on March 10. Another positive U.S. employment report in February could compel the ECB to refrain from pushing its deposit rate deeper into negative territory.
USD/JPY closed slightly higher on Friday at 116.89, ending a four-day skid. The greenback had tumbled nearly 3.50% against the yen, after reaching a 2016-yearly high last Friday in the wake of a shocking decision by the Bank of Japan to launch a negative rate policy.