NFP: Potential Scenarios for EUR/USD

It’s NFP time again, follks!

Tomorrow at 12:30 pm GMT the U.S. will print its non-farm payrolls (NFP) report. Since Uncle Sam is the largest economy in the world, investors pay particular attention to its employment numbers as it’s one of the major leading indicators of economic growth.

According to a Bloomberg Survey of 68 economists, the NFP is expected to come in at 100,000 for the month of July after printing an additional 80,000 workers last June. If this happens, it would mark the second consecutive month of increasing jobs gains for the employment sector.

Think the numbers are too optimistic? Keep in mind that the ADP report released yesterday blasted expectations for a 120,000-increase by coming in at 163,000 for July. And despite its not-so-stellar record at predicting the actual NFP figures, it’s pretty accurate in predicting its direction.

But before you buy high-yielding currencies like it’s a ticket for the Olympics’ opening ceremony, you should know that market players aren’t expecting the 100,000 figure to make a dent on the unemployment rate.

Unemployment is expected to remain at 8.2% thanks to the U.S. firms’ preparation for a possible “fiscal cliff” by next year. And that’s before we talk about deteriorating prospects for local and global economic growth!

Even Big Ben isn’t keeping his hopes up. In his testimony to Congress last month, Bernanke speculated that the reduction in the unemployment rate will likely be slow as the projected jobs growth rate is just barely above the levels needed to absorb new entrants to the labor force. Yikes!

That said, it seems to me that most people are gearing up for another set of worse-than-expected figures. To be honest, I wouldn’t be surprised if we do see the NFP report disappoint. After all, it’s failed to hit forecasts FOUR months in a row now!

How do you think will the markets react if the numbers do disappoint? And will this alter QE3 expectations?

In my opinion, it’ll come down to a battle between risk aversion and renewed hopes for more quantitative easing measures. Here are two potential scenarios that could occur should we see WORSE-THAN-EXPECTED employment figures.

Scenario A – Dollar rallies as risk aversion takes over the markets

EUR/USD Chart

This is exactly what happened at the last NFP release last July 6, 2012. After ranging during the Tokyo and London sessions, EUR/USD broke down as the employment numbers failed to satisfy the markets and we saw risk aversion take over.

Scenario B – Dollar sinks as poor NFP figures boost QE3 hopes

EUR/USD Chart

In this scenario, we would see something similar to what happened on June 1, 2012. Yes, the NFP report printed deep in the red, but instead of sparking risk aversion, we saw EUR/USD rally as this sparked hopes that the Fed would get off its butt and introduce additional quantitative easing measures.

Seeing as how the Fed has been pretty cautious lately, if we see a 5th consecutive month of worse-than-expected gains, it may prove to be the tipping point for the central bank to finally hit the markets with QE3.

Of course, nothing is set in stone. The NFP report is the granddaddy of all economic reports and we’ve seen so many different types of reactions in the past. As the adidas slogan goes, ANYTHING IS POSSIBLE!

If you think that the NFP report is too hot to handle, then the best option may be to just sit out. Having no position is a position! But if you’re trading the report, just make sure that you stick to your plan and practice good risk management skills. That way we’ll still see you around in next month’s NFP release!

  • Kasqade

    I disagree with Scenario A playing in. July 6th was BEFORE Draghi’s statement on July 28 if I remember correctly on authorities standing at the ready to do “whatever it takes” to save the Euro. Today, he made an even stronger statement against betting on any further EU doom. We also have the EUR/USD refusing to follow through on any break below a historical trading bottom wedge (chart below). Technicals even favor a move up. 

    I think the article is spot on.  The way I read it is that the possibility of any bullish move up is highly questionable given that expected numbers are hardly enough to keep with absorption. The expected 101k isnt enough. An average of 150k (last time I read on an independent policy blog) was the number to keep pace and we haven’t even seen that. To even DENT the current unemployment rate, policy analysis states that we need an excess of 220k from JULY till November to even see a reduction in unemployment numbers for the election. In my opinion this isn’t going to happen.

    So. As far as a risk aversion move is concerned I think going forward it is highly mitigated given the ECB/EU’s response to solving (or trying to) the crisis. In my opinion I’m expecting to see some moves of dollar depreciation (an old story given just about  everyone and their mothers are expecting further stimulus) against the higher yielding/haven currencies (like CAD) and possibly even the highly risk correlated currencies like AUD, EUR.

  • Daniel

    69k was a massive disappointment while 80k fell into an acceptable range. i expect it to be more like scenario A this time round.

  • Buster-48

    Im confused here why is it written “rally on both charts when one goes up and the other goes down?can rally mean up as well as down,also I thought the dollar would go down with th expectation of qe3,what am I missing here please guys.

  • Rjanderson8

    What was the reason of the huge spike in EURUSD before the crash? I’m trying to understand it but just can’t.

    • JJ6845616

      Disappointed jobs figures made traders to believe that the Fed will implement QE3 in the near future.That’s why it resulted into huge dollar sell-off.

  • Granticus_Maximus

    Ok… So I’m a noob to trading the NFP reports and stuff, but I stayed up to see what happened this time instead of getting a full night’s sleep before an early morning day at work (I’m Aussie).

    So the data came out WAY better than expected and me being a noob trader believed that would cause the dollar to go strong against the majors, but it did the opposite… After the call we saw the EUR/USD strengthen BIG time… Then we saw all currencies smash the JPY for the rest of the session… Took me totally be surprise and if I knew the result we saw was possible I probably would’ve taken a different angle.

    Any explanations on why the market acted the way it did?? I need to know so I can take better advantage next time.