NFP Preview and Forecast - How US Jobs could influence Major FX

TigerWit Africa

The US Bureau of Labour Statistics will release the May job reports later today. Meanwhile, the dollar has been in a bright mood after some encouraging data on Thursday prior to today’s event.  Employment reports in Canada are expected at the same time. So, it’s expected to be another volatile day in the Forex market.

Ahead of today’s important events, the dollar bulls have been bustling after Thursday’s upbeat data. First, the services PMI pointed to record growth in the services sector and then the number of people vying for jobs dropped below 400k – the first time since the pandemic and far better than the market’s expectation.

Also, the private sector added 948k new jobs in May which was much better than the estimate. These are pointers to the fact that US companies are hiring again and thus won’t take much longer before the Fed starts meeting on how and when to taper its current loose policies. All eyes will now be on Fed Chair Powell’s speech and the NFP on Friday.

After struggling below 90, the dollar index jumped above 90.5 on Thursday and has remained there up to Friday’s London opening time. The broad dollar strength collapsed the Euro to 1.21, Sterling below 1.41 and Gold below the 1875 key area.

NFP Preview – Why is it so important at this time?

The NFP figure and unemployment rate will have a solid effect on the dollar due to two factors. First, higher job numbers show economic recovery and will lift the domestic dollar value. Second, it could very well influence Fed’s next decision and the market will respond even before they take their next step. With the current positive data and booms in the economy, investors and traders are quite conscious of a nearby policy tapering.

If the economy has bounced back and inflation going out of hand as a result of a very loose policy, Fed would tighten. That has been investors’ sentiment that rate hike would come earlier than expected despite Fed Chair and Governors’ recent attitudes of playing down on inflation while at the same time admitting faster-than-expected economic bounce. The US Central Bankers have consistently in the past weeks said until maximum employment is achieved, the current policy will remain. Since the NFP is the leading indicator toward the Fed’s goal of maximum employment, its importance is unrivaled.

Dollar preview and NFP data

Since late last week, there have been reports that the monetary committee would meet to discuss tightening. This provided support for the Dollar after disappointing April job data and consistent dovish Fed regressed the late April surge. If we get a very robust May NFP data that beats the 645k estimates with a big deviation, the buck should finally exit the bearish trap and surge above 91 as this might encourage the policymakers to cut back their rate hike date forecast. However, another disappointing May Job data would collapse the greenback broadly and force the index back below 90. The data is therefore very important to the Fed and the market.

DXY Technical Analysis

The dollar completed a nearly 2-months old bearish impulse wave with an ending diagonal reversal pattern at 89.5. So, the current bullish correction is technically correct and should continue to at least the 38.2% Fibonacci retracement level at 91. In fact, 91.5 (50% retracement) and 92 (61.8% retracement) are also very feasible levels and should be hit if the data today favors the dollar.

However, the current rally looks like another short, below-expectation dollar correction we have been seeing since March 2021. Therefore, there is still a high likelihood of a collapse from here if 91.5 continues to resist and the NFP data disappoints as we had in April. Also prior to the job report releases, Fed Chair Powell will speak at an event. Therefore, we might see unusual pre-NFP dollar volatilities. The strength or weakness of the dollar today should be the denominating driver of the major FX going to the weekend.

It’s going to be another make-or-break day for the buck and so traders should watch out for Fed Chair’s speech and the NFP report.

Disclaimer: This communication is for informational purposes only and should not be viewed as any form of recommendation as to a particular course of action or as investment advice. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This communication has been prepared based upon information, including market prices, data, and other information, believed to be reliable; however, TigerWit does not warrant its completeness or accuracy. Trading CFDs involve risk and can result in loss of capital.

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