This week has proven a productive one so far for traders. With the return of Western traders from Summer break and heavy event risk dotting the economic calendar, volatility has clearly picked up and direction is slowly starting to peak through. That said, our first attempt at jump starting the long-awaited return to ‘risk trends’ was somewhat uneven. The ECB rate decision forced a bullish break to four year highs on the S&P 500, but the EURUSD failed to break the boundaries of its recent congestion (see charts below).
Past NFP Reaction
Now, we are heading into the second phase of this week’s one-two fundamental punch with US nonfarm payrolls (NFPs) for August. This particular indicator certainly captures the attention of the media – but can it unify on the same fundamental path once again? Looking at the EURUSD’s reaction to the previous releases this year, there isn’t much in the way of trend generation found in the aftermath. But there have been a few instances of notable volatility that could offer us enough of a push to force 1.2650.
The Big Picture of US Employment
As we can see above, the ADP generally stands in as a simplistic benchmark for the NFPs release. The August reading was only one of seven months that private payrolls topped 200,000. That said, the ADP figures are often adjusted after the BLS release to better fit.
This is the chart that politicians, central bankers and long-term investors will contemplate. Where are we in the recovery from the worst financial and economic crisis in generations? Monthly increases may be hearty, but total US employment still has a long way to catch up. Is this reason for more stimulus?
Another deceptive measure of labor market health is the weekly jobless claims data that we follow. Thanks partially to the roll off of extended benefits for claims, we have seen a sharp drop in filings for unemployment benefits. That said, even the drop in labor participation can’t hide the jobless rate statistics.
Sector Employment Readings
What the Fed Sees
And of course, we can’t look at the employment statistics without appreciating what real-world impact they carry. The market is so heavily invested in the event risk not because it is showing a rapid recovery for the world’s largest economy – but rather because it offer guidance to the next potential round of stimulus from the Federal Reserve. Will this data support QE3?
DailyFX Event Risk Trading Strategy:
- How should we approach and trade the NFPs given the heavy impact and fast market reaction? Read David Song’s Trading the News Article on the NFPs.
DailyFX Video of Market Backdrop and Likely Trends Through Next Week:
- Learn more of the market backdrop heading into the NFPs and why this particular piece of event risk is good for volatility but less capable of defining our next, major trend.
--- Written by: John Kicklighter, Chief Strategist for DailyFX.com
To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter
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