Friday's Jobs number will influence US September rate decision
The US Federal Reserve could be raising interest rates next month for the first time in nearly a decade and this Friday's Non-Farm Payrolls number will be an important factor in that decision.
Given how long US interest rates have been zero-bound that first increase could have a profound impact on global markets and exchange rates in particular. It could even breath fire back into the USD rally and see global equities, short-term bonds and risk currencies sold-off. But given the policy change has been so well telegraphed and anticipated, it's unclear how much volatility it really will unleash.
The decision will be finely balanced and there's still August's NFP number to be released Sept 4, which will have a bearing on the decision. Meanwhile, US economic data has not been spectacular recently. The main focal point for the Fed remains employment.
On that score there has been job creation in the US. Unemployment has fallen to a healthy 5.3% and for most of the last 12 month NFP numbers have been coming in at over 200,000 with March and April proving to be exceptions. But the labour participation rate is 62.6%, the lowest since the late 1970s, and this does concern the Fed.
Also, as shown by last Friday's numbers, US wages rose only 0.2% in Q2, the slowest since 1982. Along with the tumble in commodity prices, inflationary pressures therefore remain subdued.
EUR/USD could breach key support levels
Federal Reserve keen to normalise monetary policy
Given these factors there isn't a particularly strong case to raise interest rates next month, they could go later in the year, other than the Fed seems keen to start normalising monetary policy as soon as reasonably possible. It also must be aware that perpetually low interest rates risks fueling all kinds of dangerous asset bubbles and imbalances in the financial system.
If Friday's NFP number comes out at over 200,000 – forecasts are suggesting 223,000 – and if August's number is of similar magnitude, there's a good chance the Fed will feel comfortable going ahead with a 0.25% increase next month. Even if wages growth is not particularly strong the hike could still go ahead as some Fed members are concerned that with unemployment at 5.3% wage inflation is probably not far behind.
And once the Fed starts tightening, there are likely to be further increases over the next 18-24 months, possibly up to 1.5-2.0%. Given the absence of very strong economic growth and inflation, it's difficult to foresee them going much higher than that.
This could certainly see EUR/USD support at 1.0800 followed by 1.0470 successfully challenged. However, history shows that the bulk of USD rallies tend to happen ahead of the tightening cycle – once it actually starts it tends to moderate.
By Justin Pugsley, Markets Analyst, MahiFX