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Blowout NFP Primes for December Rate Hike (Maybe For Real This Time)

Blowout NFP Primes for December Rate Hike (Maybe For Real This Time)

James Stanley, Strategist

Summary:

  • NFP printed a blow-out number this morning with 271k jobs added to American Non-Farm Payrolls, and this firmly puts December in the crosshairs for that first rate hike out of the United States in over Nine Years.
  • Price Action is extremely active as investors are bidding USD higher under the premise of faster-than-expected rate hikes.
  • Traders can use this potential USD-strength to sell currencies that are looking at looser monetary policy down-the-road (looking at you, Europe).

1. Blowout NFP Print: NFP produced a huge surprise this morning: 271K jobs were added to American Non-Farm Payrolls, absolutely smashing estimates of 184k. Also a huge headline number – the unemployment rate dropped to 5%, which isn’t a completely-positive data point, as this was also coupled with another drop in Labor Force Participation.

This morning’s print smashed even the wildest top-side estimates for NFP, and this highlights growing strength in the US Labor Market that may, eventually, create enough motivation for the Federal Reserve to hike rates at their December meeting.

And while we were tip-toeing towards a higher probability of a December rate hike over the past month, as Chinese markets continued their ascent after the fright of this summer and after the European Central Bank pledged to ‘re-examine’ their QE program at their December meeting, enough pressure appears to have been removed from the Global economy to allow the world’s largest national Central Bank to stage their first rate hike in over 9 years.

Accordingly, after this morning’s print we saw the US Dollar rocket up to a new 12-year high as investors flowed into USD-based trades under the premise of a faster-than-expected rate hike. We discussed trade setups with this theme in our Market Talk published on Monday of this week, entitled, Two Ways to Trade the Euro and the Dollar. Christopher Vecchio discusses the ramifications to rate-hike expectations in his morning piece, ‘EUR/USD Slammed, USD/JPY Surges as October NFPs Crush Expectations.’

Blowout NFP Primes for December Rate Hike (Maybe For Real This Time)

Created with Marketscope/Trading Station II; prepared by James Stanley

2. Huge Move in EUR/USD: This is the primary theme that we’ve been harping on in these market talk articles/emails over the past few weeks, as this is probably one of the most attractive beneficiaries of a faster-than-expected rate hike out of the US, at least for traders; as this positive US data can drive USD-strength while a recently unveiled announcement from the European Central Bank alludes to a re-examination of their QE-policy in December (which many have taken as a sign that the ECB would increase QE, if necessary).

This is one of those rare situations in which the monetary policies of the economies represented in the pair are pointing in the same direction on the chart: As in, Europe (and the Euro) is weakening under the perceived expectation of looser monetary policy while USD is strengthening under the prospect of tighter policy.

We discussed this towards the end of September in ‘Is the Euro Down-Trend Ready for Resumption,’ in which we outlined two indications to watch for potential trend-resumption entries to the down-side. The first of those indications was a bear-flag formation that had developed after the lows came into EUR/USD in March of this year, and this broke with gusto on the October announcement from Mr. Mario Draghi. We discussed this as it was happening in the article, ‘ECB to Re-Examine QE, but Will Traders Wait to Sell EUR/USD.’ But even for traders that missed the initial move, there were numerous opportunities to enter short after the break of the flag, as old support became new resistance and traders had a chance to get short EUR/USD ahead of October’s Federal Reserve meeting. And then again earlier this week, we addressed the topic in the article ‘Euro Weakening Ahead of Draghi (Again).’

This morning provided the ‘ka-boom’ move sending the EUR/USD to a new six-month low; but the bigger move likely isn’t over yet, as this projected divergence in monetary policy is expected to continue growing in divergence. With the big news having already come into the market for this week, and with EUR/USD sitting near support, traders may be advised to wait for a more opportunistic entry level.

On the chart below, we’ve identified some potential resistance levels that may become relevant in the early portion of next week.

Blowout NFP Primes for December Rate Hike (Maybe For Real This Time)

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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