GBPUSD: Trading the Non-Farm Payrolls report

The ultimate US labor market indicator – non-farm payrolls for February– is due for release on Friday. The data is likely to show the economy added 190K jobs in February and the unemployment rate remained steady at 4.9%. The wage growth is seen slowing slightly.

What happened last month?

• The economy added 151k in January following a 262k December increase (revised down from 292k) and a 280k rise seen in November (revised up from 252k)

• The January payrolls figure was below the 221k average for last year

• The unemployment rate dropped to 4.9% from 5.0%

• Average hourly earnings rose 0.5% m/m and 2.5% y/y

The headline figure was horrible, but was widely expected. Furthermore, the jobless rate dropped and the wage growth spiked, which saved the day for USD bulls.

February non-farm payrolls could match estimates, risk of a downside surprise exists

Majority of the advance indicators released over the month indicate the US labor market is standing on stable ground.

Indicators in favor of upbeat payrolls figure

• Jobless claims average dropped in February to 270K from January figure of 285K. Feb’s average is also below December figure of 277K.

• Continuing claims have changed largely unchanged between January and February.

• US ISM manufacturing employment index ticked higher to 48.5 in Fed from Jan figure of 45.9.

• ADP private sector employment rose 214K, compared to the expected figure of 190K and higher than the January figure of 193K.

• As per JOLTS job opening data, the number of jobs opening in December climbed to its second-highest level ever. Job quits reached 3 million for the first time in nearly a decade--an extremely positive indicator of a fundamentally healthy labor market.

Indicators pointing to dismal payrolls figure

• US ISM non-manufacturing employment index dropped to 49.7 Feb vs 52.1 Jan

• US consumer confidence fell to 7-month low in February. American became a bit more pessimistic about job prospects and business conditions

Overall, the payrolls figure could match estimates or miss the expectations by a small margin, given the drop in the service sector employment index.

GBP/USD could drop if payrolls match estimates

Sterling has regained poise following last week’s sharp 500-pip fall to a seven-year low of 1.3835. The spot now trades around 1.4150; which is just short of 1.4154 (38.2% retracement of 1.4669-1.3835). 

However, the UK side of the story is not impressive –

• UK services PMI dropped to lowest since March 2013

• UK construction PMI dropped to 10-month low

• UK manufacturing PMI dropped to 34-month low

• Furthermore, Brexit fears are still intact!

On the other hand, US side of the story looks comparatively strong, given the strong durable goods orders, personal spending report released over the last week. 

Furthermore, Economists say the economy only needs about 80,000 new jobs per month to keep the economy near full employment-about half the number created last month.

Hence,

• Cable could fall if the NFP figure matches estimates/beats estimates along with upbeat wage growth numbers

• On the other hand, a sharp drop in the NFP along with weak wage growth figure could help Cable rise towards 1.4252 (50% of 1.4669-1.3835)

GBP/USD Technicals

• Sterling’s bullish price-RSI divergence on the hourly chart followed by an inverted head and shoulder breakout pushed the pair higher to 1.4150. 

• The inverse head and shoulder opened doors for a rally to 1.4165 (23.6% of 1.5230-1.3835). The level is just above 1.4154 (38.2% of 1.4669-1.3835). 

• Only a daily close above 1.4165 would open doors for 1.4252-1.43 levels. As of now, such a move appears likely only if the payrolls figure disappoints markets by a big margin.

• On the other hand, a failure to take out 1.4165 could send the pair back to 1.4032 (23.6% of 1.4669-1.3835).

• A strong payrolls report could send the pair below 1.4032 on daily closing basis. Such a move could be an indication the sell-off in Cable has resumed.