Dollar Higher on Tax Cut Optimism Ahead of Jobs Report

The US Economy is expected to add 200,000 jobs in November

The USD is higher against most major pairs ahead of the release of the November U.S. non farm payrolls (NFP) report. Tax reform optimism have benefited the dollar, with only the pound gaining against the American currency due to a high possibility of the UK and the EU finding a way to move forward on the Irish border deadlock. Geopolitics have set the tempo in the market and while the two tax bills await becoming one pice of legislation the threat of a movement shutdown in the US has been minimized as there are signs that the House will approve legislation to prevent a weekend partial shutdown.

The first of the employment release this week dropped with the publication of the ADP private payrolls report. US private employers added 190,000 jobs, 5,000 more than expected. The U.S. Bureau of Labor Statistics will release the non farm payrolls (NFP) report on Friday, December 8 at 8:30 am EST. The economy is forecasted to have added 200,000 positions in November. Once again the emphasis will be on average hourly wages for signs on inflationary pressure. While the market has already priced in a rate hike of 25 basis points in the next Fed meeting doubts remain on what the central bank will do in 2018. Weak inflation is the biggest argument the doves within the FOMC have used to debate waiting before raising rates again. Wages are forecasted to have gained 0.3 percent in the last month after a flat reading in October.

The US job market is expected to have recovered from the effects of hurricane related volatility, but with soft inflation being a point of debate within the FOMC, strong wage growth is needed for the hawks to gain the upper hand. A survey of economists conducted by Reuters already forecasts 3 or more rate hikes in 2018 as Yellen’s term as Chair ends and Jerome Powell’s begins.

The EUR/USD lost 0.17 percent on Thursday. The single currency is trading at 1.1776 ahead of the release of US U.S. non farm payrolls (NFP). The USD is gaining on the back of tax cuts expectations and the performance of the stock market. With the pro-growth policies of the Trump administration on the eve of becoming a reality the market is pricing back in some of the momentum from earlier in the year. Geopolitics have complicated matters as President Trump’s decision to declare Jerusalem as the new site of the US embassy has added unwanted instability to the region.

European Central Bank (ECB) head Mario Draghi was in Frankfurt to agree on the final set of rules on Banking Supervision. The set of rules were aimed at how to avoid bailouts for banks taking lessons from the Great Recession. The ECB will meet next week to announce its rate statement. The rate is expected to remain at 0 percent but given the trend of European growth there could be a surprise in the December meeting or in the first quarter of 2018. Geopolitics will be a big part of the end of the year for the EUR as the Catalan elections will take place on Dec 21.

The GBP/USD gained 0.62 percent on Thursday. The currency pair was one of the best performers on the day thanks to a new draft for the Irish border proposed. There will be a statement tomorrow as negotiations will continue to find a deal that satisfies the DUP and the Irish Government. The DUP rose in prominence thanks to the ill advised snap election called by UK Prime Minister Theresa May than rather than solidify their majority saw it almost slip away. Partnering with the Northern Irish DUP was the only way for the Conservatives to remain in power but as Ireland is part of the EU it brought the issue of the Irish border to a new level.

The EU has backed Ireland on the border dispute. The Brexit negotiations remain deadlocked until this issue is sorted. The UK is eager to move into trade negotiations as there is no current plan B in place when the divorce from the UK is official. There have been some advances as the two parts are closer than they were after the referendum was voted on, but issues like the Irish border need to be sorted before moving on.

Market events to watch this week:

Friday, December 8
4:30am GBP Manufacturing Production m/m
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

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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