Dollar Awaits US Jobs Report

Tax reform talk and improving data give USD a boost

The US dollar recovered form the soft start of the trading week and is looking ahead of the release of the U.S. non farm payrolls (NFP) on Friday, September 1 at 8:30 am EDT. A strong ADP figure published on Wednesday saw private employers add 237,000 positions in August. The official report due on Friday is expected to have added 180,000 jobs after the 209,000 added the month before. Wages will be the real focus as traders will look for evidence that the U.S. Federal Reserve is ready for a third rate hike this year.

Inflation has remained close to flat in the US and its been a subject of discussion on Fed members. The leading camp has decided to risk raising rates with soft inflation but the lack of growth in wages could lead the central bank to close out 2017 with only a reduction of the balance sheet it accumulated during its quantitative easing program.

The second estimate for the US GDP in the second quarter was above the expectations and hit 3 percent. Price and wage inflation remains muted given the economy is growing at a faster pace and could end up taking a third rate hike off the table.

The EUR/USD dropped 0.076 percent on Thursday. The single currency is trading at 1.1891 ahead of the release of US employment data on Friday. The EUR broke through the 1.20 price level earlier in the week but ran out of momentum as the US indicators slowly turned the tide. ADP employment data and a better than expected second GDP estimate have boosted the US dollar ahead of the publication of the influential NFP report due tomorrow.

The USD recovered across the board, with the main exception being the CAD after a strong Q2 GDP release. The moves against the USD seemed overdone but with political turmoil and Hurricane Harvey and little data to go on in the beginning of the week there was hardly anywhere for the USD to go. With some distance from the Jackson Hole summit which brought little support the dollar, economic indicators and a push for tax reform are lifting the USD. The move will be confirmed if on Friday the NFP report not only manages to show a strong headline number of jobs, but also a rise in wages.

Energy prices jumped 2.594 percent in the last 24 hours. The price of West Texas Intermediate is trading at 47.15 after the Trump administration has tapped the Strategic Petroleum Reserve to ease the disruption caused by Hurricane Harvey. The US government will loan its reserves to a refinery set in Louisiana, unaffected by the tropical storm in an effort to offset the shutdowns in Texan refineries.

The US also holds gasoline in emergency reserves and could consider tapping into them if gasoline prices remain elevated during the next couple of weeks until refineries can come back online. Harvey affected about a quarter of Texan refineries and is expected to be two to three weeks until they can reassume operations.

The USD/CAD lost 0.889 percent in the last 24 hours. The currency is trading at 1.2515 near daily lows after a surprise increase in the expected rate of growth of the Canadian economy. The monthly gross domestic product (GDP) release shoed a 4.5 percent rate of growth beating estimates of 3.3 percent. Strong consumer spending was one of the main drivers of the accelerated rate in the second quarter.

The highest rate of growth in six years has put back on the table a follow up rate hike by the Bank of Canada (BoC) before the end of the year. The central bank cut rates twice in 2015 down to 0.50 percent and with a quick pivot in June, announced a rate hike in July against previous expectations of a 2018 first quarter move. The BoC has made it clear that those cuts are no longer needed as the economy has recovered from the impact of low oil prices. A rate hike in the October meeting could still happen given the strong data released today and is propelling the loonie higher versus the greenback.

Market events to watch this week:

Friday, September 1
4:30 am GBP Manufacturing PMI
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
10:00 am USD ISM Manufacturing PMI

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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