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Will U.S. Non-Farm Payrolls Fuel Dollar Selling?

By Michael Wright, Currency Analyst
04 November 2010 19:41 GMT

Talking Points

  • ADP Employment Doubles Expectations
  • U. of Michigan Confidence Edges Lower
  • Initial Jobless Claims Rises To its Highest Level in 4 Weeks
  • Unemployment Rate Expected to Return to 9.7 Percent in November
  • Monster.com Employment Index Returns to Augusts’ Level

Currency traders will shift the spotlight from the FOMC rate decision to U.S. nonfarm payrolls for the month of October as the U.S. economy continues to face major headwinds. Indeed, the Fed recently announced 600 billion dollars worth of asset purchases in order to promote growth in the world’s largest economy. As of late, economists are forecasting a 60K rise in payrolls after figures dropped a massive 95K the previous month, while the unemployment rate is expected to remain unchanged. Tomorrow’s NFP report is critical for the greenback as U.S. dollar selling resumes.

Indeed, this month will mark the first time since February in which census workers will not have a full impact on the payrolls report, while private payrolls may increase some 75,000. Meanwhile, average hourly earnings will likely continue its course and advance 0.1 percent. At the same time, the unemployment rate is expected to rise to 9.7 percent from 9.6 percent as the pace of payrolls fails to keep up with labor force expansion. Taking a look at the labor force developments ahead of the NFP report tomorrow, the ADP employment index doubled economists’ expectations during the month of October to reach its highest level since May. However, the initial jobless claims for the week ending October 30th rose to its highest level in approximately 4 weeks, while the Monster dot com employment report scaled back to 136 from 138 in September. The latter is of particular importance because the index measures overall employee demand from online recruitment activity, reviewing more than 1500 websites. Thus, the indicator is a signal that hiring may remain subdued in the short term.

For the past two months, I have noted that “the 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.” This factor will come to light in October’s report as the unemployment rate is forecasted to rise to 9.7 percent from 9.6 percent in September. On the positive side, the recent asset purchases by the Fed is expected to boost employment and consumer prices as both figures remain at depressed levels. Until the labor force gathers pace, further dollar selling is likely.

All in all, tomorrow’s NFP report is crucial for the U.S. dollar as the currency remains at the crossroads subsequent to the FOMC rate decision. A struggling labor market will validate the Fed’s recent decision, and in turn will lead the dollar index to continue its southern journey, with a test of 75.00 likely to be the result.

Willl_Nonfarm_Payrolls_Fuel_U.S._Dollar_Selling_body_nfp.png, Will U.S. Non-Farm Payrolls Fuel Dollar Selling?

Created by Michael Wright

Willl_Nonfarm_Payrolls_Fuel_U.S._Dollar_Selling_body_unemployment.png, Will U.S. Non-Farm Payrolls Fuel Dollar Selling?

Source: Bloomberg– Created by Michael Wright

The unemployment rate in the U.S. has fallen from a high of 9.9 percent in April to 9.6 percent in August. However, going forward, the jobless rate is expected to return to at least 9.8 percent in the near term as previously discouraged workers re-enter the workforce.

EUR/USD Daily Chart

Willl_Nonfarm_Payrolls_Fuel_U.S._Dollar_Selling_body_eurusd15.png, Will U.S. Non-Farm Payrolls Fuel Dollar Selling?

Source: Intellicharts – Prepared by Michael Wright

EURUSD: The pair has extended its two day advance and now looks poised to test 1.45 in the medium term as the euro continues to benefit from U.S. dollar weakness. Technical indicators are pointing to further gains, while our speculative sentiment index stands at -1.45, and signals for further upside risks. Not to overlook, the MACD is on the verge of crossing over to the upside.

Written by Michael Wright, Currency Analyst

To Receive Future Articles by Email, please contact me at mwright@fxcm.com

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

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04 November 2010 19:41 GMT