Currency Markets Shift Focus to the U.S. Nonfarm Payrolls Report for August

Talking Points

• Census Workers Fell Approximately 119K Between July and August
• Unemployment Rate Likely to Increase From its Yearly Low
• Monster.com Employment Index Scales Back to 136, Lowest Since May
• ADP Employment Unexpectedly Falls in August
• U. of Michigan Confidence Revised Lower

The number of temporary census workers declined approximately 119,000 between the weeks of the July and August payroll survey periods. Despite the expected drop in census workers private employment likely remained subdued during the month of August. One illustration of the lackluster labor demand by the private sector is displayed in the Monster.com employment index. Figures fell to 136 in August from 138 the previous month to mark the lowest level since May. The reading is of great importance in that the index measures the overall employee demand from online recruitment activity, reviewing more than 1500 websites. Also worth noting is the fall in the less-reliable ADP employment report. The breakdown of the report showed that small firms reversed course after the component helped to alleviate some of the weight of the mass losses amongst manufactures in July. Last month, these figures soared 37K; however, the nonfarm payrolls report plunged 131,000. Now with the ADP index unexpectedly pushing lower during the month, could this be a sign of a dour outlook for the U.S. labor force?

Going forward, the recent extension in federal-aid to unemployed workers will have the long term effect of workless persons losing their jobless benefits. During that time, those unwaged workers will seek employment at an antagonistic pace. Thus, the unwinding of benefits will likely cause a negative spillover effect onto consumer spending, and consumer prices. At the same time, as those unemployed workers re-enter the labor force, the unemployment rate will continue to push higher. All in all, slack in the economy weighed by a weakening labor force paired with tight credit conditions will keep a cap on spending as households fear additional headwinds in the comings months. Recently, the University of Michigan consumer confidence report for the month of August was revised lower, with the breakdown showing that economic confidence also pushed lower as consumers are burdened with an uncertain economic outlook. Therefore if we see a flight to safety during the early Asian and European trade, a disappointing labor force report from the U.S. may validate further GBPUSD, EURUSD losses.

Created by Michael Wright

Source: Bloomberg– Created by Michael Wright

The unemployment rate in the U.S. has fallen from a high of 10.1 percent in October to 9.5 percent in July. However, going forward, the jobless rate is expected to return to at least 9.7 percent in the near term as previously discouraged workers re-enter the workforce.

EUR/USD Daily Chart

Source: FXCM’s Strategy Trader – Prepared by Michael Wright

Euro at the Crossroads. The euro has extended its two day advance against the greenback; however price action looks to be capped by the 20-day moving average. Recently, the pair broke below both the broader and narrow ranges, in which I token advantage of by shorting at 1.3100. I will remain short the pair going into tomorrow’s NFP report as the 20-day SMA now looks poised to crossover below the 50-day moving average.

GBPUSD Daily Chart

Source: FXCM’s Strategy Trader – Prepared by Michael Wright

British Pound. After reaching the highest level since February, the GBPUSD has worked its way into a tight descending channel which has remained intact since the beginning of August. So long as the pair can continue its trend or break below the range, my short position from 1.54469 will survive. In my view, the break below the ascending trend line two weeks ago still validates further downside risks.

Related Articles: EURUSD – Trading the Change in U.S. Non-Farm Payrolls

Written by Michael Wright, Currency Analyst

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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical’s, Intraday Trading, Weekly Spotlight, and Forex Trading Weekly Forecast