Next two NFP numbers pivotal for US rate rise & USD
With the US Federal Reserve putting markets on notice that it would after all like to raise interest rates in December puts even more focus on the next two Non-Farm Payrolls numbers coming up before year end.
It seems a strong USD and the state of the financial markets have been pushed aside as concerns for the Fed in terms of its monetary policy decision making – a change on its earlier stance. Nonetheless, a rate rise in December is not a forgone conclusion and the odds of it happening are 50/50.
Given the greater clarity on the Fed’s thinking from last week’s FOMC meeting -- it’s more concerned with domestic issues – the next two NFPs numbers will be pivotal in its decision making and the direction of USD. Two numbers above 200,000 and a further fall in the headline unemployment rate are very likely to see the Fed finally pull the trigger. But even a number not far below 200,000 could still see the Fed tighten.
The Fed’s last FOMC meeting for this year takes place on December 15-16.
Also, the Fed may well want to raise interest rates for reputational reasons – much like the boy who cried wolf (too often) – they’ll lose credibility if they keep preparing markets for the event, but then fail to follow through.
For the Eurozone, Japan and other developed countries this is likely to be welcomed as a stronger USD will act as a counter-balance to their weak currency and stimulus policies. But for many emerging market countries, which have borrowed heavily in USDs this could be quite a troubling development and could see further routs in their currencies and local financial markets.
Market expectations for October NFP – to be released this Friday – are for 180,000 jobs created, which would be up on last month’s weak number of 142,000. That particular number could turn out to be a blip in an otherwise strong run of jobs numbers of over 200,000 a month for much of this year. The hourly rates will also be watched for evidence of wage inflation.
Though the US labour participation rate remains at its lowest in nearly 40 years, there’s evidence of tighter labour markets in a number of US cities and consumer sentiment remains buoyant. Nonetheless, there are some worrying signs for the US economy with the manufacturing sector potentially struggling and is often a leading indicator of recession – unlike employment trends that are a lagging indicator. Manufacturing has been hit by the strong USD and the slowdown in the energy sector following the fall in oil and gas prices.
This week’s NFP number could trigger considerable volatility especially if it comes in well outside the range of expectations. But the really important number for market expectations is likely to be the next one released in early December.
Another factor to focus on for December is that while the Fed could be raising interest rates and that could be seen as a done deal ahead of the FOMC meeting, especially if job numbers are strong, the contrast will be with the European Central Bank, which could make some very dovish statements that month as it worries about deflation. That would mean more losses for EUR/USD.
TECHNICAL ANALYSIS: EUR/USD approaching support as NFP looms
Last week it was the Fed’s turn to unsettle market consensus over the direction of currencies as it made clear that a December rate rise is entirely possible if not desirable.
Naturally, this saw EUR/USD fall back and is now resting just above key support at 1.0897, 1.0881 followed by 1.0808. Resistance is placed at 1.1015, 1.1059 and 1.1106.
In terms of the technical, EUR/USD continues to widen out the Bollinger bands on the dailies – a sign of volatility, which is usually followed by a calmer period when they narrow due to consolidation, for instance. The slow stochs did issue a strong buy signal, which was working, but has since unwound.
Going into Friday’s NFP, EUR/USD volatility is likely to dissipate considerably as the number will be very closely watched – an unexpected number could unleash explosive volatility and set the direction for the pair for the rest of November.
By Justin Pugsley, Markets Analyst, MahiFX