Tomorrow at 1330BST, we get the announcement of the latest Non-farm Payrolls number and it is sure to be another key driver of markets such as forex and gold. The dollar has been rallying recently but will this continue after the announcement of Non-farm Payrolls. The recent FOMC statement suggested that the Fed was looking far more at domestic factors once more and remains data dependent on its view as to when it next chooses to increase the Fed Funds rate. That means that Non-farm Payrolls will be of key focus for traders. The US dollar has picked up off its lows and the payrolls data could be the difference between a continuation of the move or whether this rally will be sold into once more.
Economic data should now drive the Fed’s decision making and this adds emphasis to Non-farm Payrolls. In removing the focus on the “global financial and economic risks” from the FOMC statement, the US data will take on far more importance. This week, we have seen the ISM Manufacturing weaker than expected, but the ISM Non-manufacturing coming in ahead of expectations. The Atlanta Fed’s GDPNow model suggested that the US was running at around 1.8% annualised growth for Q2 in the wake of the ISM Manufacturing miss but this may be slightly adjusted higher now in the wake of yesterday’s surprise beat for the services sector PMI. The Atlanta Fed was very close to its Q1 modelling of GDP and the pick up to 1.8% is clearly showing a better showing in Q2. However is it enough to change the Fed’s view of “moderate” growth in the US economy? A strong payrolls report will help to bolster economic expectations.
The 4 week moving average of the US weekly jobless claims was at 258,000 today which is the lowest level since the mid-1970s and this reflects the unemployment rate which has been 5% or just below for the past 6 months (the consensus expects unemployment to stick at 5.0%). Having been in consistent decline since mid-2008, the labor force participation rate has been either flat or rising for the past 6 months and has picked up from 62.4% (which was the lowest since 1977) to 63.0%. Furthermore, average hourly earnings are expected to show +0.3% for the month and a pick up to +2.5% for the year, again showing signs of traction. This would all suggest that aside from the headline payrolls, the rest of the data released in the Employment Situation report is showing continued positive trends.
So what of the headline Non-farm Payrolls data? The ADP Employment change on Wednesday creates a degree of uncertainty. A surprise drop to 156,000 considerably missed expectations of 196,000 and was the lowest reading since April 2013. The ADP report does have a chequered history of being a harbinger for Non-farm Payrolls, but there will be an element of caution to trading in front of the decision. However the ADP may also help to give the dollar more of a boost after the payrolls announcement as if traders are pleasantly surprised by payrolls (due to the caution driven by ADP) then the dollar could strengthen more. The consensus expects the US to have added 202,000 jobs last month. Anything above 200,000 tends to be seen as a decent number (some estimates suggest that the US needs to generate between 150,000 and 200,000 jobs per month for the labor market to be “growing” due to population changes and retirements).
The IMPACT
As ever a strong payrolls report would be strong for the dollar. The recent dollar rally has managed to break back through some key near term levels that might suggest a continuation of the move.
- EUR/USD is back below the old resistance at $1.1465
- Gold is back below the breakout level of $1282.50.
However the Dollar Index shows that the near term bounce is yet to break decisively through the overhead resistance around 93.6. Also dollar/yen is still a key barometer and this continues to languish under 107.60/107.80. This would suggest that the market is still uncertain of the continued recovery.
If payrolls are strong tomorrow there is likely to be a near term reaction higher and decisively through the resistance. A move that is likely to take the Dollar back towards the April highs in the coming days. On the Dollar Index this is around 95.2 which is 1.7% higher. This would equate to:
- around $1.1250 on EUR/USD. There is a decent band of near term support between $1.1330/$1.1395 with the April lows back around $1.1215.
- around $1260 on gold. This is the bottom of the band of support between $1260/$1282.50 which I believe is likely to contain the next higher low.
- around 108.90 on dollar/yen. There is a near term pivot at 108.70 and the old key neckline which is again resistance at 109.75.
Whatever the number though, as per usual it is likely to be a volatile reaction due to the importance being given to economic data as the market speculates over the next Fed rate hike. It will certainly be one for the short term traders.
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