NFP Preview: Could a strong US jobs report help boost the struggling dollar?

The official US jobs data for December will be reported on Friday morning by the US Department of Labor, and consensus expectations are pointing to a likely continuation of the strong job creation that prevailed through much of last year (September weather disruptions notwithstanding). Around 190,000 non-farm jobs are expected to have been added to the US economy in December following a better-than-expected showing of 228,000 jobs added in November. Given Thursday’s strong ADP jobs beat for December, Friday’s official non-farm payrolls could potentially surpass expectations once again.

In the run-up to Friday’s jobs release, the US dollar has mostly been selling off sharply since mid-December, due in part to doubts as to whether the US Federal Reserve can keep up with its most recent outlook for three interest rate hikes in 2018, given ongoing concerns over lagging inflation.

The beginning of the new year this week continued to see overall weakness for the dollar, even despite Wednesday’s hawkish-leaning release of minutes from December’s FOMC meeting, in which the Fed raised its benchmark federal funds rate by 25 basis points. The minutes revealed optimistic assessments of the US economy and higher projections for GDP stemming from the anticipated effects of the new US tax policy. With respect to jobs, Fed officials were nearly unanimous in attributing the rate hike in part to continued labor market strength.

The question remains, however, as to whether the struggling US dollar will be able to make a meaningful rebound anytime soon, given a Fed that remains mostly hawkish-leaning and an outlook for continued strength in US economic growth and jobs. Friday’s employment data outcome should provide some clues as to potential dollar direction and sentiment further into 2018. As there is a good possibility that the NFP jobs data could beat expectations once again, the resulting moves in the US dollar should be indicative of prevailing dollar sentiment as the new year kicks off.

Current NFP Expectations

As noted, the consensus expectations for Friday’s headline non-farm payrolls data point to around 190,000 jobs added in December. The December unemployment rate is expected to have remained low and steady from the previous month at 4.1%, while average hourly earnings are expected to have increased by 0.3% after the previous month’s weaker-than-expected 0.2% increase.

Jobs Data Preceding NFP

Key employment-related releases preceding Friday’s official jobs data have shown a somewhat mixed employment picture overall, but December’s ADP private employment report came out substantially better than expected. The ADP release showed a stellar 250,000 private jobs added in December against a prior forecast of around 190,000. Although the ADP report is not necessarily a very accurate pre-indicator of the official NFP jobs data from the US Labor Department – and sometimes even misses the mark dramatically – it does help provide a useful guideline when used in conjunction with other employment-related data.

One of the most important of these other indicators is the ISM manufacturing PMI employment component, which showed expanding job growth at 57.0 in December, albeit slower than November’s 59.7 reading. For the services sector, the ISM non-manufacturing PMI will be released on Friday after the US jobs report, and will therefore not be included as pre-NFP input.

Finally, December’s weekly jobless claims have generally been mixed, but have remained low overall from a historic perspective.

Forecast and Potential USD Reaction

With consensus expectations of around 190,000 jobs added in December, our target range falls between 200,000-220,000, given the pre-NFP data inputs, particularly the strong ADP reading. Any result falling within or above this range is likely to give the US dollar a boost, as it would help confirm the Fed’s optimistic outlook for the economy and the path to higher interest rates in 2018. An outcome falling modestly below the range, in contrast, would likely hit the dollar, as bearish sentiment continues to plague the greenback for the time being. Finally, any reading that falls well below the range could make a strongly negative further impact on the dollar.