NFP to Decide Fed Rate Hike Timing

Employment Data Key to Federal Reserve Interest Rate Decision

The U.S. dollar managed to trade in a tight range on “Super Thursday” as the Bank of England was more dovish than expected leaving the Federal Reserve in a possible lead on the race to hike interest rates. The non farm payroll (NFP) report published on Friday, August 7 at 8:30 am EDT will be a big piece of data that could drive a rate hike in September.

Employment data in the U.S. has been mixed. The ADP private payrolls posted a below forecast figure which was somewhat balanced by a positive weekly unemployment claims. The market is now eagerly anticipating the NFP to guide the USD and potentially position the U.S. central bank to raise rates if American employment continues to be the reliant performer for the economy.

ADP Private Payrolls Missed Mark

The ADP private payrolls survey came in lower than anticipated at 185,000 new jobs. The forecast called for a gain of 216,000. The ADP broke a two month streak of above 200,000 new jobs added. Although the private number does not have a heavy correlation with the non farm data released two days later, it does give some insight into the overall strength of the employment component. A softer ADP does put more pressure on the NFP to over perform as more question marks begin to appear.

U.S. Trade Balance Shows Growing Deficit

The U.S. continues to suffer from a strong USD as imports increased and widened the trade deficit to 43.8 billion. This marked a 7.1 percent growth month over month of the deficit. Exports continued to shrink as imports advanced boosted by a stronger USD. The final trade balance figure was $1.1 billion above the forecast. All major trading partners gained versus America as Europe, Canada and Mexico with the one surprise of China importing more from the U.S. than last month

US Non Manufacturing ISM Boosts USD

The USD came roaring back after a surprising non manufacturing ISM released at 10:00 am EDT. The service sector came to the rescue as it printed a 60.3 reading, the highest since 2005. The market was anticipating a 56.2 reading. The non manufacturing sector accounts for two thirds of U.S. economic activity so the data was supportive of an interest rate hike by the U.S. central bank.

BoE dovish on rate hike

The Bank of England (BoE) released its decision on interest rates, how the monetary policy committee voted, and the quarterly inflation report, its latest view on the state of the UK economy in the same day which made it a “Super Thursday”. The BoE was not particularly “super” and instead of soaring like a hawk which some market watchers were expecting it flew like a dove. The central bank held rates at the all time low rate of 0.50 percent. The meeting minutes which for the first time would be released at the same time as the decision showed that as expected there was dissent in the decision to hold rates. The surprise came in the size of the dissent. Only one policymaker voted for an immediate rise of the interest rate. The market was expecting at least two given last year’s record. Three would have made it seem like the Monetary Policy Committee was turning hawkish. Instead the single vote against holding rates was seen a dovish. The GBP retreated after the deluge of data was digested and all eyes are now on the NFP release on Friday.

Unemployment Claims

The Forex market’s “Super Thursday” included an important U.S. employment indicator with the release of the U.S. unemployment claims. The jobless claims were reported slightly lower than expected at 270,000 putting the overall metric close to a four-decade low.

NFP Expectations

The U.S. NFP is forecasted to record a gain of 224,000 jobs to the economy. Employment has been the sole consistent component in the U.S. economy and has kept an impressive pace to bring back several metrics back to pre crisis levels. The downside appears to be the gains are mostly on the headline figures, like the number of jobs created and the rate of unemployment. Wage growth and even the quality of the jobs are still lagging which have been cited as concerns by the central bank. A strong showing in Friday’s jobs report can take the Fed one step closer to announcing the first rate hike. September is the next available FOMC meeting, yet a disappointing NFP could push it back to December or later. The U.S. economy is not firing in all cylinders and if its strongest engine sputters it could trigger a sell off of the USD.

USD events to watch this week:

Friday, August 7

8:30am USD Non-Farm Employment Change
8:30am CAD Unemployment Rate
10:00am CAD Ivey PMI

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza