USD Rally Awaits Employment Report

The Dollar has Rebounded despite mixed economic indicators

The U.S. dollar is heading towards the Friday morning release of the U.S. non farm payrolls (NFP) report with a strong rally that was not slowed down by the lower than expected ADP private payrolls report and higher unemployment claims this week. The ADP non-farm employment change showed a 156,000 job gain, short by 50,000 of the forecast. Weekly unemployment claims rose to 274,000 coming in higher than the anticipated 261,000. While both data points do not spell disaster and in fact still show a strong employment trend the market anxiety on the NFP report has regained some of the attention that made it the biggest indicator in forex.

Employment has been the strongest pillar of the U.S. recovery after the credit crisis. Yet the strong numbers are showing an uneven recovery. Unemployment claims are at 43 year lows but consumers are not spending. Headline jobs figures and the unemployment rate are back to pre crisis levels, yet wages have barely moved.

The release of the U.S. NFP on Friday, May 6 at 8:30 am EDT is expected to add more than 200,000 new jobs to the U.S. economy and keep the unemployment rate at 5.0 percent but the focus on the market and Fed officials will be on gauges of wage inflation. The Federal Reserve has taken a more holistic view of employment and has reduced the emphasis on the headline NFP headline and unemployment rate to favour signs of growing inflation.



The EUR/USD lost 0.794 percent in the last 24 hours. The pair broke through the 1.14 price level to touch a daily low of 1.1386 and now sits at 1.1402 awaiting the employment report. The USD has been on a tear since Tuesday when the market considered the dollar to be heavily undersold. Fed rhetoric has been supportive of the USD, although it remains to be seen how serious Fed members are with their rate hike forecasts. Central bankers have been jawboning a June rate hike that might not be in the cards, but for now they are sticking to that what appears to be mostly a bluff.

Goldman Sachs has upgraded their forecast for the U.S. non farm payrolls (NFP) and expect the employment number to crush expectations with a number closer to 250,000 and a 4.9 percent unemployment rate. The Fed has ignored previous employment reports that have over performed on the headline numbers, but with little wage growth to signal inflation. The USD has built strong momentum that will be put to the test on Friday. The best possible outcome for a June Federal Open Market Committee (FOMC) rate hike expectation would be a solid headline number and higher wages. Missing the inflation component would reduce June rate hike expectations as it would show a similar mixed scenario like that one that played out this week with ISM non manufacturing and manufacturing PMIs. Services are thriving, but manufacturing is barely expanding and continues to shed jobs.
Forex markets events to watch this week:

Friday, May 6
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate

*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, he 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