Article source: fxstreet.com
Aside from the major central bank statements lined up for this week, the upcoming U.S. non-farm payrolls release on Friday is set to rock the forex market as well. Can the U.S. can keep up its impressive streak of hiring gains? Or will we see a disappointing figure for February? Here’s what you need to know if you’re planning on trading this event:
What is this report all about?
If you’re new to all this, then allow me to give you a quick rundown of why the NFP is such a big deal. You see, this employment change report indicates how many jobs were gained or lost during the reporting period so it provides a pretty good picture of how the labor situation is faring. Meanwhile, the jobless rate shows the percentage of the labor force that is unemployed so a lower figure is generally good for the economy.
Employment reports like these serve as a leading indicator for economic performance, as an improving jobs situation usually boosts consumer confidence. This encourages them to spend more instead of being tight-fisted with their cash, leading to stronger domestic spending and production, as businesses try to keep up with the pickup in demand. This allows the economy to grow and positive employment trends to carry on, with companies increasing hiring as they expand their operations. Pretty neat cycle, huh?
How did the previous releases turn out?
The U.S. economy has been churning out one stellar jobs report after another for the past five months, as the NFP reading consistently surpassed market expectations and eventually brought the jobless rate to record lows. In January, the economy added 257K jobs and even showed upward revisions in previous reports. Underlying data suggests that the improvements might continue, as the participation rate indicated that more Americans are returning to the labor force to resume their job hunt.
Wage growth has also been promising, with average hourly earnings picking up by 0.5% in January. This confirms that the positive momentum in the labor sector is translating to higher salaries, as job openings have also reached record levels.
What is expected this time?
For the month of February, the U.S. is expected to have added 241K jobs, slightly lower than the previous month’s 257K gain. The jobless rate is projected to fall from 5.7% to 5.6% for that period while average hourly earnings could see a mere 0.2% uptick.
But if the earlier jobs releases are any indication, it’s that forex market participants seem to be bracing themselves for another upside surprise. I mean, it’s hard to imagine that the U.S. economy will print an NFP figure that’s below its average of 259K in hiring gains for the past year!
How could the U.S. dollar react?
Based on previous NFP releases, stronger than expected data typically leads to more gains for the U.S. dollar while weak readings spark a selloff. After all, strengthening labor market trends could push the Fed closer to hiking interest rates or at least altering their forward guidance to indicate that they are thinking about tightening.
So far, Fed policymakers are already acknowledging the improvements in employment but it looks like they’re still waiting for more clues that this recovery can be sustained. Another month of better than expected jobs figures might be enough to convince the FOMC to take a more hawkish stance, which could lead to another wave higher for the U.S. dollar.
As it is, major forex pairs are consolidating around key levels, with recent COT positioning updates showing that long dollar positions have reached extremes. With that, a weak NFP report might be enough to spur profit-taking if forex traders start doubting that the Fed can afford to hike rates this year.