U.S. Jobs Report Could Reignite USD Rally

Global economic indicators have not improved in 2015 so far. The sluggish growth in China and looming deflation in Europe continue to pressure global markets. Terror alerts are on the rise after high profile attacks around the world. The U.S. dollar started strong and it continues to gain across the board, but the high anxiety in the markets has the currency in need of a strong employment report to validate the claim that the U.S. economy is on track to recovery.

Private Sector Adds 241,000 in December

Payroll processor ADP reported better-than-expected private jobs growth in the United States. The expectations were for 226,000 after the November report came in lower-than-expected at 208,000 jobs. The trend is positive with 57 straight months of job gains over 186,000. The December gains of 241,000 were mostly in the service sector (194,000). However, the ADP report is not an accurate predictor of nonfarm payrolls (NFP) data. That divergence was clear in November when ADP disappointed while NFP beat expectations at 321,000 new jobs. Why the ADP data matters is because it is giving a positive trend to employment which should be reflected in the overall NFP trend, but could lead to false expectations on the monthly headline number.

December NFP Expected to Show a Positive Trend

Forecasts and predictions from market analysts are pointing to a NFP report showing 236,000 new jobs added in December. This is considerably lower than the November print of 321,000, but it would still result in a strong jobs gain overall. Given the way November’s NFP defied expectations there is the possibility that the number will be revised downward.

Yellen and the Fed Are Looking at More than Headline Numbers

The market will be awaiting the NFP report to dig deeper into the overall employment situation. The Federal Reserve has moved its focus from the headline number of new jobs and the unemployment rate that improved even beyond its expectations, but it is not targeting a more complex dashboard where the American economy is still struggling. Wages have not recovered from pre-crisis levels and there is a concern that the new jobs tend to have higher part-time representation.

The EUR/USD has been losing ground as the European Central Bank keeps promising a sovereign bond-fueled quantitative easing program while economic indicators continue to warrant intervention. The NFP report would be the first indicator this year that validates a lower price point for the pair if it continues to beat expectations. Regardless of the unemployment rate, a gain higher than 200,000 jobs would signal the U.S. economic recovery is on track, and it will give a shot in the arm to the USD’s advance versus not only the EUR but all major and exotic pairs. A weaker-than-expected NFP would not have such a negative effect, unless jobs gains don’t increase north of the 200,000 threshold. A disappointing digit will fuel anxiety about the American economy especially after the turbulent start to the year.

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