With all the central bank events going on this week, you might be forgetting that the U.S. is set to release its NFP report on Friday! In today’s edition of my Forex Trading Guide, let’s figure out what this release would mean for the U.S. economy and how it could affect the Greenback.
Why is this report important?
From an economic standpoint, the non-farm payrolls release is a must-see because it serves as a leading indicator of consumer spending and overall economic activity. After all, strong jobs gains and labor market stability tend to make consumers more confident in their financial situation and more willing to spend.
This explains why most traders take NFP figures into consideration when it comes to predicting U.S. dollar trends. In this article on the U.S. jobs data and its effect on USD long-term price action, one can conclude that the dollar has been reacting mostly to fundamentals lately, which means that a good NFP figure tends to be dollar bullish while a bleak one usually leads to dollar weakness.
What happened last time?
The April NFP report printed better than expected results, as the U.S. added 288,000 jobs for the month versus the estimated 216,000 gain. To top it off, the previous month’s reading was upgraded to show a 203,000 rise in employment from the initially reported 192,000 increase.
The jobless rate also saw a huge improvement from 6.7% to 6.3%, but components of the report revealed that this was mostly caused by a staggering drop in the participation rate. Average hourly earnings were unchanged, which means that there was virtually no wage growth for the period.
After selling off for a few days as traders weighed in on the potential impact of the record-low participation rate on Fed policy bias, the U.S. dollar managed to rally for the rest of the month when the FOMC statement highlighted the positive points of the jobs release.
What is expected this time?
For the month of May, the U.S. economy probably added 212,000 jobs, a slower pace of jobs growth compared to the previous month. This would mark the fourth consecutive month in which the U.S. saw more than 200,000 in hiring gains – more or less enough for the economy to recover all the jobs lost during the financial crisis.
Meanwhile, the jobless rate is projected to tick higher from 6.3% to 6.4%. This may seem like not-so-good news at first, but analysts claim that the positive trend in hiring would be enough to convince thousands of Americans to return to the labor force and lead to a jump in the participation rate.
How could the dollar react?
Since the headline figures are expected to be weaker compared to the previous month’s readings, the U.S. dollar might be in for a quick dip once the results are printed. Of course there’s always the chance that actual figures could come in better than expected, and this scenario might lead to a strong dollar rally on Friday’s New York trading session.
On the other hand, weaker than expected data might trigger a similar reaction to the April NFP release, wherein the dollar sulked for almost a week before recovering. Always remember to take a look at the underlying figures, such as the participation rate or wage growth, when it comes to predicting whether the Greenback is in for more gains or not.
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