Could NFP support a dollar recovery?
Fawad Razaqzada February 2, 2018 8:01 AM
The main theme so far in the week has been rising government bond yields in the US and especially Europe amid expectations that global economic growth and therefore inflation will pick up further in the coming months. This has in turn helped to support the idea that the ECB will have no choice but to end its extraordinary loose monetary policy in the not-too-distant future before potentially embarking on a rate-hiking cycle. The Fed’s expected future rate hikes have been well documented and mostly priced in. This is why the yields spread between US and Eurozone government debt has narrowed and why the EUR/USD has risen. The rising euro and yields have been a toxic mixture for European equities this week, although shares on Wall Street have also come under pressure, for a change.
Today, the US nonfarm payrolls report has the potential to reverse the dollar’s downward trend – at least in the short-term – should we get a positive surprise, and a big one at that. This will be the first jobs data for the year and expectations are pointing to an improvement over December’s disappointing outcome. Around 180,000 non-farm jobs are expected to have been added to the US economy in January following a worse-than-expected showing of 148,000 jobs added in December. The unemployment rate is expected to have remained at 4.1%, while average hourly earnings are expected to have increased by 0.2% after December’s 0.3% rise. It terms of leading indicators, the ADP private sector payrolls report came out ahead of expectations, while the ISM manufacturing PMI employment component grew at a slower pace compared to December. Meanwhile the employment component of the dominant services sector will be released on Monday which will therefore make it even more difficult predict the outcome of today’s jobs report.
Ahead of the NFP release, the dollar has managed to bounce back a little against some currencies but nothing meaningful. In January, the dollar posted its worst monthly performance since March 2016. With the dollar failing to respond positively to a hawkish Fed, it remains to be seen how much of an impact the jobs report will provide. So the bigger risk is that the dollar’s selling could accelerate today in the event of a worse-than-expected jobs report. This would only serve to boost the ongoing bearish sentiment that continues to exist towards the dollar.
USD/JPY for the bulls, should NFP beat
In the event the data beats expectations then it makes sense to look for signs of dollar strength against currencies which have underperformed, such as the yen. While the likes of the EUR/USD, CHF/USD and GBP/USD have rallied above their highs last year, the JPY/USD has yet to do the same. With both GBP/JPY and EUR/JPY surging higher, the yen is clearly the weakest currency after the dollar. Indeed, the USD/JPY is actually up for the third day ahead of the jobs report after it defended key support at 108.30-45 area last week. With prices breaking above the 109.70 short-term resistance level, this is now going to be the first line of defence for the bulls. If we get a closing break back below this level today then all bets are off for the bulls. However if the dollar holds its own then we could make a case for a possible rally in the USD/JPY in the coming days. There are a few short-term levels worth keeping an eye on now, starting at 110.20, formerly resistance, followed by 110.85.
Source: eSignal and FOREX.com.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.