It’s been a busy week in the forex market thanks to a bevy of major central bank rate statements and economic data releases. But currency traders won’t rest before the major data event of any month: the U.S. nonfarm payrolls (NFP) report due on Friday. Currently, the USD is higher against major pairs thanks to a combination of factors. Positive U.S. data added to dovish remarks from global central bankers to boost the buck on the expectation that the Federal Reserve will hike interest rates later this year.
The NFP has been the positive outlier on otherwise softer U.S. economic data releases. Even when the headline number has beat expectations and the unemployment rate has hit pre-crisis lows, the market has been well-trained by the Fed to dig deeper into the details and look for soft spots. Wage growth, in particular, will be in focus as analysts will scour the report for signs that corporations are paying higher wages.
It’s All in the Details
A major economic indicator that the Fed is focused on is the employment component. A strong NFP that beats expectations of 230,000 jobs will be shot in the arm for the U.S. economy, and it could pressure the Fed to consider raising interest rates in June. The USD would rise if nonfarm employment skips above expectations on the back of rate divergence in the summer, as opposed as the current forecast of early fall.
Two U.S employment data points this week have been softer-than-expected. ADP’s national employment report showed a gain of 212,000 private-sector jobs. Economists had expected 219,000 new jobs. Unemployment claims rose last week by 7,000, adding to a total of 320,000 higher than the forecast 295,000. The NFP does not correlate with both figures, but since they are employment indicators, it would not be a surprise if NFP underperforms versus expectations.
The degree of missed forecasts is also a factor as the NFP is predicted to come in around 235,000 with a decrease of the unemployment rate to a six-year low of 5.6%. A sub-200,000 number would trigger a USD selloff, but anything in the vicinity of the forecasts will leave the USD flat. The market has had a tendency to overreact to softer U.S. data as it breaks the narrative of the economic recovery. The NFP has managed to beat forecasts consistently with some exceptions, which could also cause unrealistic expectations from analysts.
Central Bank Policy Divergence a Motivator
Interest rate divergence will continue to influence the EUR/USD. The longer the European Central Bank (ECB) maintains an easing monetary policy, and U.S. economic indicators align with the Fed starting a tightening cycle, the pair will continue to trade lower.
ECB President Mario Draghi had little to say earlier today that was new to the market. The biggest piece of information he provided was the start date of March 9 for the much-awaited quantitative easing (QE) program. There are concerns, however, that the size of the program in comparison to the U.S. or U.K. QE stimulus will not be enough to lift in the European economy out the doldrums. The statements from Draghi had the intended effect of depreciating the EUR as the message of lower rates for longer was loud and clear. Optimism for European Union growth was present courtesy of the bank’s optimistic forecasts for 2015 and 2016, in turn hinting at the expected outcome of unleashing the stimulus program.
Regardless, market watchers and currency traders will be eagerly awaiting the release of the NFP, which is sure to jolt financial markets before the weekend.
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Alfonso Esparza
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
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