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DXY Looks to ADP, ISM Services for Clues for Friday's NFP Report

DXY Looks to ADP, ISM Services for Clues for Friday's NFP Report

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- The US Dollar has settled into the middle of its triangle/wedge (via DXY Index) as it waits for catalysts to spark a trend.

- Two pieces of data due out today should yield important insight as to how Friday's March US Nonfarm Payrolls report will turn out.

- The retail crowd is both slightly net-long EUR/USD and GBP/USD, which may be a good sign of the US Dollar; however, positioning in USD/JPY is worrisome.

FX markets have been rather quiet the last few days, the first week of April and Q2'17 (April is usually a bad month for the US Dollar and a good month for the British Pound, according to 20-year seasonality statistics). Of course, at least for the US Dollar, traders are waiting for the ever-important Nonfarm Payrolls report due out on Friday, which tends to suppress volatility in USD-pairs in the days leading up to it. However, with two important pieces of data set to be released today, expectations for the March US labor market report may be refined, offering an opportunity for traders to recalibrate expectations ahead of Friday's report.

Later today, the US ADP Employment Change report and the US ISM Services/Non-Manufacturing Index will be released. Using a regression model, the ADP report and the ISM Services report can account for 89% of the changes in the NFP figure (R^2 = 0.89) over the past 10-years. Assuming both reports meet expectations (consensus forecasts call for +189K for ADP and 57 for the ISM Services), the US Nonfarm Payrolls report would be looking for another print around +200K this Friday.

It's important to recognize that due to the unseasonally warm weather the United States experienced in the first few months of the years, jobs growth was probably 'pulled forward' from forthcoming jobs reports. There may be a giveback period, where NFPs sag relative to the outstanding figures seen in January and February. Nevertheless, with respect to the NFP report on Friday, so long as it comes in above +75K to +125K, the jobs data will be good enough to keep the economy on track to maintain the unemployment rate (U3) at 4.7% through the end of 2017 (as per Fed Chair Janet Yellen's commentary at the end of February).

As the data, we'll be keeping an eye on the Fed rate hike expectations curve. While we're not expecting the Federal Reserve to raise rates when they meet next on May 3 - it isn't a meeting in which they'll release a new Summary of Economic Projections (SEPs) - there may be implications for rate hike expectations. According to Fed funds futures contracts, only one rate hike is priced in for the remainder of 2017, with a 59.3% chance of a hike in June.

See the above video for technical considerations in DXY Index, EUR/USD, USD/JPY, and Gold.

Read more: DailyFX European Desk Round Table: Brexit Begins, ECB Pushback, French Elections

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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