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Nonfarm Payrolls preview: can it bend Fed's hand?

  • Speculative interest anticipating a dismal outcome.
  • US employment data will be traded accordingly to how could it affect odds for a rate cut.

The American dollar heads into the release of the monthly Nonfarm Payroll report with quite a soft tone, undermined by speculation that the Fed could cut rates in the near term, and mounting global trade tensions. In this scenario, the once all-relevant US employment report can hardly be a game changer.

The US economy is expected to have added 185K new jobs in May, while the unemployment rate is seen steady at 3.6%, a 49-year low. Average hourly earnings are forecasted to have risen by .03% MoM and by 3.2% YoY, in line with the yearly average.

The thing is that after a series of disappointing employment-related reports the market is “suspecting” a dismal reading coming. The ADP survey showed that the private sector added just 27,000 new jobs in May, way below the yearly average and the expected 180K. Additionally, weekly unemployment claims were higher than anticipated throughout the month, although holding near multi-decade lows.

That said, market players are sort of ready for a reading below analysts forecast, rather than to upbeat numbers.

A one-standing disappointing report won't bend Fed's hand, but for sure will increase odds of a rate cut, therefore adding pressure on the vulnerable greenback. The market will focus on wages, as easing growth there will be more critical for the central bank, than jobs' creation.

A positive surprise, on the other hand, could trigger a dollar's comeback, particularly against European rivals, as despite their recent recoveries, no relevant breakout has occurred, so far.

Anyway, the market will react accordingly to the change in odds for a rate cut in the US.

Major pairs' probable reactions

The EUR/USD pair has failed twice this week to sustain gains beyond the 1.1300 level, although holds on to gains nearby. Same goes for the Pound-Dollar, struggling to extend gains beyond the 1.2700 figure. Given that ECB's statement was mostly encouraging, and that the Brexit political chaos is in a stalemate, for now, both pairs are meant to rise on numbers missing expectations.

The more interesting reaction, however, could take place around USD/JPY. The pair is at multi-month lows but without signs of exhaustion, neither of a trend-change coming. Barely holding above 108.00, speculative interest will try to push the pair toward the flash-crash lows and test bulls' determination there. For sure won't happen this Friday, but a dismal NFP could be the perfect catalyst for such a bearish run.

Canada will also release employment data, which means that the USD/CAD pair will probably be the most volatile and risky one to trade unless the reports' results are clearly divergent.

Author

Valeria Bednarik

Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.

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