Dollar Flying After NFP Shows Strong Wage Gains

Hurricanes Hit Number of Jobs but Not Wages

The USD dollar is higher across the board against major pairs. The American currency posted weekly gains against major pairs, but had a mixed performance Friday in the aftermath of the release of the U.S. non farm payrolls (NFP) report. The expected impact of hurricanes in September manifested itself in the first negative NFP reading since 2010. The US economy lost 33,000 jobs in September, but wages surprised with a 0.5 percent gain. The focus of investors has shifted from the headline number of jobs to inflation indicators, such as wages. The strong gain was quickly priced in with the CME FedWatch tool showing a higher than 90 percent probability of a rate hike in December.

The next hurdle for a December rate lift by the U.S. Federal Reserve will come with the release of retail sales and consumer price index (CPI) data on Friday, October 13 at 8:30 am EDT. Retail sales were weaker than expected in September with a contraction in the headline number. Inflation on the other hand met the forecast and given the focus will be on the CPI for clues that validate or weaken a case for a Fed December hike.

The pound has fallen to a one month low as Prime Minister Theresa May, has lost the confidence of a large group of Conservative MPs with a potential ouster in the cards. Disappointing data and political uncertainty are anticipated to continue next week for sterling despite hawkish comments from Bank of England (BoE) policy makers. The euro remains under pressure from the after shocks of the Catalonia independence referendum and awaiting further developments.

The EUR/USD lost 0.75 percent in the last five days. The single pair is trading at 1.1693 in a week that saw the resurgence of the USD with strong economic releases, Fed members supporting a rate hike and the rise in wages putting some inflationary pressure. European data was mixed by contrast with the biggest topics once again turning to political uncertainty. The Catalonia independence referendum and the response by the Spanish government have brought the fragility of the EU into focus once again. Brexit talk and the political infighting within the Conservative party in the UK also weighted on the euro versus the greenback.

US indicators will dominate the calendar in the week from October 9 to 13. FOMC member speeches, the release of the minutes from the September FOMC meeting, US producer price index, inflation and retail sales with only the speech by European Central Bank (ECB) President Mario Draghi on Wednesday a highlight for the EUR.

The GBP/USD lost 2.67 percent this week. Cable is trading at 1.3038 with markets losing confidence in Prime Minister May and her party might be pushing to oust her. Disappointing data this week in construction and manufacturing PMIs offset comments from Bank of England (BoE) policymakers about a possible rate hike later this year. Ian McCafferty and chief economist Andy Haldane issued comments this week that supported the view of Governor Mark Carney about the economy being strong enough to remove stimulus. That is precisely the point that was put in question by the weak data and presents an issue for the BoE. After so much rhetoric to hike rates will the current trend of soft data forced them to rethink their intended rate path, or do they follow through in fear of losing credibility?

Manufacturing production data will be released on Tuesday, October 10 at 4:30 am EDT on a week with little UK indicators to guide traders. The US economic calendar is not as busy but will feature the release of the September Federal Open Market Committee (FOMC) meeting minutes on Wednesday, October 11 at 2:00 pm EDT and comments from FOMC members throughout the week. The highlight of the week for the GBP/USD will be the release of inflation and retail sales data. In the past it has proven to be a tough obstacle for a NFP driven dollar rally to survive.

Market events to watch this week:

Tuesday, October 10
4:30am GBP Manufacturing Production m/m
Wednesday, October 11
2:00pm USD FOMC Meeting Minutes
Thursday, October 12
8:30am USD PPI m/m
8:30am USD Unemployment Claims
10:15am EUR ECB President Draghi Speaks
11:00am USD Crude Oil Inventories
Friday, October 13
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m

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

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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