Friday’s NFP should provide more clues on US interest rates & USD
Expectations for further US interest rate rises have recently oscillated from very unlikely this year to more so thanks to better GDP data – however, it’s the employment data, which is more closely followed by the US Federal Reserve, that will provide the biggest clue on monetary policy.
The market consensus is that February’s Non-Farm Payroll numbers will come in at 190,000-195,000 jobs created with the unemployment rate at 4.9%. This compares with January when 151,000 jobs were created; December: 292,000; November: 211,000 and October: 271,000.
A number at or above expectations is likely to reinforce forecasts for a rate rise this year, possibly by June and a very strong number could even trigger March rate-rise talk. That would push USD up and rumble risk assets and currencies, which are likely to sell-off strongly.
However, a weaker number, particularly if it’s close to 125,000 or below, could once again put rate rise expectations on ice and send USD tumbling on the crosses while risk currencies and equities could rally. It could give the Fed an excuse to signal a pause.
Though, jobs are a lagging indicator and can rise for a while even as the economy loses momentum, there have been mixed signals coming out of the US in recent months. True GDP numbers have received upward revisions – other numbers haven’t been so encouraging.
For a start, US company earnings have declined for three-quarters in a row for the first time since 2009, raising the possibility, that if the trend continues, they’ll be firing rather than hiring people.
Meanwhile, the Chicago Purchasing Managers Index recorded 47.6, a number below 50 signals contraction and it was below estimates of 52.0 and last month’s number of 55.6. New orders have fallen from 58.8 to 51.7, production declined from 62.5 from 44.0 and pending home sales fell by 2.5% in January to its weakest in a year.
The point being, that is if these type of numbers keep coming though, then eventually they will feed through into NFP and even GDP, which is a backward looking number anyway. Whether that will show up in Feb’s NFP number is much harder to tell – they can be difficult to predict on a month on month basis.
The jury still remains out on whether the US economy is going through a temporary slowdown or is sliding into a period of prolonged sluggishness, which may once again call for a more interventionist monetary policy.
TECHNICAL ANALYSIS: Whether EUR/USD downtrend continues depends on NFP
Since reaching a high of 1.1376 on Feb 10-11, EUR/USD, has been engaged in a steady retreat to hit a low of 1.0825 on Mar 1-2 – very much reflecting divergent expectations on monetary policy between the two economic blocks.
Support can be seen at 1.0825, 1.0812, 1.0793 and 1.0782 and if it’s a particularly strong NFP number then even 1.0539 could be reached. A weak NFP number would likely see resistance levels challenged starting with 1.0914, 1.1017, 1.1074 and even 1.1128.
Meanwhile, the daily RSI has been approaching oversold and the Slow Stochastics indicator is in deep negative territory. The last time that happened – end of October to end of November – EUR/USD was in the grips of prolonged slump. Whether that’s repeated will in part depend on Friday’s NFP number.