NFP Forecast: Will strong payrolls & wage growth help US dollar regain poise?

It’s the first non-farm Friday of 2017 and the markets are pretty much at the mercy of the US President Donald Trump’s executive orders and Tweets.

Dollar is on the back foot

Take note of the fact that the US dollar is on the back foot ahead of the payrolls release. The long Dollar positions are being squared-off as President Trump has only delivered on ‘hard’ promises so far and the dollar bulls need quick action from Trump on the fiscal front.

What this means is the sell-off in the US dollar could be exaggerated in case the wage growth numbers disappoint and/or the payrolls figure shows there is a considerable slack in the labor market.

On the other hand, strong wage growth numbers may not lead to a stellar dollar rally given the bearish undertone. Moreover, it is feared that Trump would eventually devalue the US dollar, thus marking a major shift in USA’s exchange rate policy.

Non-Farm Payrolls - What the lead indicators say?

The Non-Farm Payrolls figure due this Friday is expected to show the economy added 175K jobs in January. The December print was 156K. The unemployment rate is seen unchanged at 4.7%. The average hourly earnings growth is seen slowing to 0.2% m/m from January figure of 0.4%.

• The ADP private payrolls released earlier this week showed the private sector added whooping 246K jobs in January.
• The US ISM manufacturing PMI also revealed a growth in employment in the manufacturing sector.
• The US consumer confidence fell in January and highlighted less optimistic outlook for jobs.
• The four-week moving average of initial jobless claims stood at four-decade low of 248K.

In recent months, the correlation between ADP and NFP has improved. Thus, one may expect the NFP to beat estimates. Rise in the manufacturing jobs plus drop in the jobless claims suggests potential for a strong NFP number.

However, NFP above 200K could be a bad news for the US dollar…

US non-farm payrolls & US unemployment rate

Strong non-farm payrolls could actually end up weakening the US dollar. This is because it would highlight the slack in the labor market and the need for the Fed to be more patient!

This is because, the unemployment rate is almost near levels last seen ahead of the great financial crisis. Of course, the drop in the participation rate is one of the major reasons.

Nevertheless, with the unemployment rate at 4.7%, a payrolls figure of well above 200K would actually represent a slack in the labor market and thus the dollar may quickly erase the initial gains.

Meanwhile, a pick up in the unemployment rate would only add credence to the view that the Fed could be more patient.

Thus, we can conclude, that payrolls alone are unlikely to help the US dollar regain bullish tone.

Dollar Bullish scenario - Strong wage growth figures coupled with flat/upbeat payrolls number could lift the US dollar across the board.

Dollar Bearish scenario - Disappointing wage growth figures could lead to another round of dollar selling.  The sell-off could be exaggerated as the dollar is already on the back foot as mentioned above.

EUR/USD - strong resistance around 1.0850

EURUSD weekly chart

EURUSD daily chart

• There is potential for a further rally in EUR, given the daily RSI is above 50.00 and still short of the overbought territory. The 50-DMA has bottomed out as well, while the weekly chart also shows a bullish 5-MA and 10-MA crossover. The RSI is well short of the overbought region on 1-hour and 4-hour chart.
• However, the 100-DMA at 1.0807 is still sloping downwards. Furthermore, there is still resistance at 1.0850.
• Hence, the pair could roll over and fall back to 1.0730-1.0680 if the wage growth numbers beat estimates by a big margin.
• On the other hand, resistance at 1.0850 could be breached in case of the Dollar Bearish scenario discussed above.
• Going purely by the chart, the spot appears on track to test 1.0850 levels. Above 1.0850, a stiff resistance is seen directly at 1.10. Only a daily close below 1.0620 would suggest bullish invalidation.
• Also note, the equity markets are showing signs of exhaustion, which further strengthens the bid tone around EUR (carry unwind).

Gold - Fast approaching descending trend line hurdle

Gold daily chart

• The trend line hurdle is seen at $1230/Oz levels.
• A daily close above $1230 appears likely if the wage growth numbers disappoint. However, immediate resistance is lined up at $1241 (Oct 7 low) and $1250. Hence, caution is advised.
• The metal could revisit $1200 levels if the wage growth numbers beat estimates by a big margin.
• Going purely by the chart, the metal looks set to test the trend line hurdle. Only a daily close below $1180 would signal bullish invalidation.