USD Retreats Awaiting NFP Boost

Soft US Data Pushed Back Fed Next Rate Hike Pummelling the Dollar

The USD has depreciated against major pairs all week. American economic data has been weaker than anticipated with both purchasing manager indices (PMI) manufacturing and non-manufacturing coming in under expectations. The lone bright spot this week was the ADP private payroll report with a gain of 205,000 jobs beating a forecast of 195,000. Unemployment claims rose 8,000 putting some strain on the resilience of the jobs component. The final piece of jobs week comes with the release of the U.S. non-farm payrolls (NFP) report on Friday, February 5 at 8:30 am EST.

There market expects the NFP report to show a gain of 189,000 new jobs added to the American economy. Last month there was a monster number of new jobs with 292,000 so a lower number is anticipated with this month’s report. The strong ADP is being offset by the increase in unemployment claims and it will be up to the NFP to dictate the path of the USD with the currency in dire need of good news this week.

The EUR has advanced 2.36 percent versus the dollar this week on the back of U.S. soft data. The pair is trading above the 1.12 price level at 1.221 near weekly highs. Lows for the EUR came at the beginning of the week. As soon as U.S. data started hitting the wires the USD started to tumble. The USD is on the back foot against all major pairs as growth indicator remain weak and have discounted monetary policy changes from the U.S. Federal Reserve when it meets in March. The Fed had originally forecasted 4 rate hikes this year, but given the volatile start of the year and the slowdown in emerging and developed markets the market is starting to anticipate a lower number.

The U.S. presidential elections have not jumped to the forefront of USD pricing as they final vote is still too far away to influence the currency. During the final stretch of political campaigns the Fed will not be able to intervene, further limiting the window it has to dictate monetary policy which again make the 4 rate hikes unrealistic at this point.

A strong NFP has been ignored by the Fed in the past, specially if it lacks the evidence of wage growth. A 200,000 job gains would not be a game changer for the FX market as it awaits how the Fed will interpret such a gain if it comes to pass. A miss below 180,000 could further hurt the USD as fundamentals work against the higher price levels of the currency given to a potential higher rate divergence. With the Fed unwilling to hike rates and the ECB issuing contradictory statements on more QE in March, investors will be following the employment data release for clues into the next moves from central banks.

USD events to watch this week:

Friday, February 5
8:30am CAD Employment Change
8:30am CAD Trade Balance
8:30am CAD Unemployment RateUSD
8:30am USD Non-Farm Employment Change
8:30am USD Trade Balance
8:30am USD Unemployment Rate

*All times EST