Talking Points:

- Ahead of the US jobs data today, rates markets are pricing in a 100% chance of a Fed rate hike in December.

- Expectations for the headline NFP figure are high because of the expected 'give back' following the impact of Hurricanes Harvey and Irma on the southeastern United States.

- Retail trader sentiment continues to shift in a way that suggest USD-pairs may still turn higher.

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Following one of its best weeks of the year, the US Dollar (via DXY Index) has traded largely sideways in the week before the October US Nonfarm Payrolls: the DXY Index closed last week at 94.81, and was trading at 94.76 at the time this report was written. Overall, price action remains bullish for the DXY Index, holding above its daily 8-, 13-, and 21-EMAs; and with both MACD and Stochastics continue to trend higher above their respective signal or neutral lines.

Chart 1: DXY Index Daily Timeframe (June to November 2017)

Preview for October NFPs and Outlook for the US Dollar

The forthcoming report this morning may offer little if any meaningful insight into trends underlying the US labor market, just like the September US labor market update. As history shows, following a natural disaster in the US, jobs figures tend to sharply below trend in month one (September jobs report), rebound sharply above trend in month two (today's October jobs report), and return to trend in month three (next month's November jobs report). We will probably have to wait another month until market participants begin to look at US jobs data with a more critical eye.

As would be the case for a 'give back' month, expectations for the October US Nonfarm Payrolls report are extremely high. Why? The hurricanes that made landfall in the southeastern United States in Q3'17 resulted in the first negative headline NFP figure in seven years in September.

The unemployment rate expected to hold at 4.2%, and the headline jobs figure to come in at +312K. Wage growth is due in around +2.7% from +2.9% previously (y/y). Earlier this week, the private payroll number, as measured in the ADP Employment Change report, suggested that +235K jobs were added to the economy in October.

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 4.2% through the end of 2017 (as per outgoing Fed Chair Janet Yellen's commentary at the end of February). The Atlanta Fed Jobs Calculator shows that the US economy needs to add +112K jobs each month for the rest of 2017 to maintain the unemployment rate at 4.2%.

From this point of view, the US Dollar's bullish posture should remain intact heading into next week, regardless of what the October US Nonfarm Payrolls report reveals. In particular, so long as US Treasury yields continue trending higher, the US Dollar remains a favorable 'buy the dip' candidate against the lower yielding safe haven currencies like the Japanese Yen or Swiss Franc.

Chart 2: USD/JPY Daily Timeframe (April to November 2017)

Preview for October NFPs and Outlook for the US Dollar

Both USD/CHF and USD/JPY retain bullish technical structures ahead of the US jobs data today. In both pairs, price is above the 8-, 13-, and 21-EMA envelope, while MACD and Stochastics are trending higher in bullish territory (above the median or neutral lines). For USD/CHF, the double bottom target of 1.0108 remains in play following the break through 0.9770 last month. For USD/JPY (as pictured above), a move above 114.50 is eyed (the May and July swing highs) to signal the beginning of continuation higher.

Read more: Asymmetric Risk Ahead for British Pound as BOE Weighs Rate Hike

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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