Talking Points:
- The importance of today's US Nonfarm Payrolls report is higher after the FOMC's meeting on Wednesday.
- DXY Index needs a strong showing otherwise the threat is high for a break of the year-long bullish trend.
- Ahead of the US labor data, crowd positioning is net-short EUR/USD, GBP/USD, and USD/JPY - which point to weakness for the greenback.
Join me today at 8:15 EDT/12:15 GMT for live coverage of the February US Nonfarm Payrolls report in the DailyFX Live Trading Room - register here.
The key issue surrounding today's April US Nonfarm Payrolls report is whether or not the US labor market is improving enough to reduce labor market slack and push up wage growth (which should help inflation), in order to justify the Federal Reserve hiking rates again before the end of the first half of 2017. With Fed funds futures contracts already pricing in around a 70% chance of a rate hike when the FOMC meets in June, traders are feeling confident at the moment that more policy tightening ahead. Market participants will be paying attention to the wage component of the report in particular, which has been admittedly lacking gusto despite the unemployment rate holding near the Fed's defintion of "full employment" (at 5% or lower) since for October 2015.
Current expectations for today's data remain strong despite seasonality concerns from economists, with the unemployment rate expected to hold at 4.5%, and the headline jobs figure to come in at +190K. Wage growth is due in around +2.7% y/y, slightly off of the +2.8% figure seen earlier this year, which was near a seven-year high.
The aggregate forecast heading into this report has jumped increased after data the past days. Wednesday’s April US ADP Employment report showed +177K new jobs created last month, while the April US ISM Services/Non-Manufacturing index eased slightly to 57.5. Using a 10-year rolling model, the ADP report and the ISM Services report can account for 89% of the changes in the NFP figure (R^2 = 0.89). In sum, these proximal trackers of the US labor market correspond with pace of jobs growth between +175 to +200K.
It's important for the US Dollar that there is a rebound in the headline NFP figure after March's disappointing +98K reading. At Wednesday's FOMC meeting, officials stated that data weakness at the end of Q1'17 was 'transitory,' so a strong showing by the US labor market report today will do well by the greenback to confirm this point of view.
The big picture: 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 4.5% through the end of 2017 (as per Fed Chair Janet Yellen's commentary at the end of February). The Atlanta Fed Jobs Calculator shows that the US economy needs to add +121.2K jobs each month for the rest of 2017 to maintain the unemployment rate at 4.5%.
See the above video for a technical review of the DXY Index, EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD, Crude Oil, and Gold.
Read more: Webinar: Central Bank Weekly: FOMC Primes USD for NFPs; ECB Hands Off Euro
--- Written by Christopher Vecchio, Senior Currency Strategist
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