USD Under Pressure Awaits Employment Report

Federal Reserve Mixed Messages Have Dollar Down Against Majors

The USD is on track to record the worst quarterly performance since 2010 as Fedspeak and Fedfacts have clashed. The March Federal Open Market Committee (FOMC) disappointed with its dovish tone, specially after the European Central Bank (ECB) had gone all out on its quantitative easing (QE) push earlier in the month. Fed member hawkish remarks reversed the USD down trend, only to be brought down to earth after Fed Chair Yellen’s speech at Economic Club of New York.

The ADP private non-farm payrolls report published on Wednesday showed an addition of 200,000 new positions. Jobs in the service sector have rebounded more strongly, with the biggest gains coming in companies with less than 50 employees. The U.S. non farm payrolls (NFP) does not have a perfect correlation with the ADP, but it does exhibit some of the same trends.

The U.S. non farm payrolls (NFP) report will be published on Friday, April 1 at 8:30 am EDT. The U.S. is expected to have added more than 200,000 new jobs keeping the unemployment rate steady at 4.9 percent. The focus of investors will quickly turn to the wage growth. The Fed during its FOMC statement and two Chair Janet Yellen speeches has stuck to a dovish outlook for the U.S. economy that need a stronger boost than the headline jobs number can provide. Inflation expectations are low and one area where a strong NFP in the wage growth component could make a difference for future rate hike estimates.

The EUR has gained 1.87 percent versus the USD in the past 5 days. The U.S. dollar has not been able to recover from the soft data and mixed messages from the Fed. The lowered expectations of interest rate hikes in 2016 have the pair at 1.1387 and a disappointing NFP could move the pair above 1.14 and beyond as the Fed has also said that rate cuts are not out of the question if needed.

OANDA MarketPulse’s Dean Popplewell wrote earlier about the three main factors in the NFP:

Typically, investors and dealers would be searching for clues for any re-pricing of Fed policy expectations. But this week’s Fed rhetoric has squashed U.S rate normalization occurring any time soon. So what is it that capital markets should be looking for in non-farm payrolls (NFP)?

In a utopia world, to trump concerns of global growth and continued financial stability onlookers require the U.S’s jobs report to show healthy job additions, higher wage growth and a labor participation rate showing some traction. Because all of the three variables rarely move in unison, the primary focus of the market was to concentrate on job growth. With the U.S consistently ticking that box for the past year, the markets naturally shifted its focus to wage growth.

The U.S’s impressive growth in jobs has generally not translated to meaningfully higher wages, at least until now. The jobs report for January and February suggested that this might be changing, albeit slowly. Any improvement in pay, along with a gradual recovery in the labor participation rate, is expected to lead to higher consumption.

The NFP is called the most important economic indicator, but of late it has lost some of its shine given the Fed has moved away from using the headline jobs number to dictate monetary policy moves. The U.S. central bank is now facing a more uneven recovery, where the number of positions goes up, but wages remain frozen or worse decrease. The NFP still has the power to impact markets, but this time around it will do so with inflationary indicators that could convince the Fed to hike sooner rather than later. Vice versa more low inflation data could raise further doubts in the American central bank and bring about a rate cut if global economic conditions remain weak.

USD events to watch this week:

Friday, Apr 1
4:30 am GBP Manufacturing PMI
8:30 am USD Average Hourly Earnings m/m
8:30 am USD Non-Farm Employment Change
8:30 am USD Unemployment Rate
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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