NFP Forecast: How Will Forex React to US Employment Data?

Between Facebook (NASDAQ 🙂 low and negative forecasts, a Bank of England rate hike and European Central Bank concerns about inflation, yesterday was a very lively day on the forex market. The euro and the pound rose in the wake of rate decisions, leaping more than a cent per. Despite the decline in equities, risk currencies were sought after as the global tightening cycle fueled the appetite for yield. Thanks to a strong increase in, and were among the best performers of the day.

Although the Bank of England raised interest rates and the European Central Bank left its monetary policy unchanged, the euro quadrupled its performance compared to, as the BoE expected a rate hike of 25 basis points. And, as we wrote yesterday, some market participants were hoping for a 50 basis point hike. In some ways, the BoE’s decision was more disappointing than the ECB’s indications, even though it was the BoE’s first consecutive rate hike since 2004. Underlining the split within the central bank, four of the nine members were in favor of a larger move, but a majority of the five members, including Governor Andrew Bailey, felt that with weaker growth it made more sense to go in 25 basis point increases. The central bank will also begin to reduce the size of its bond holdings. It is clear that the Bank of England will proceed with further rate hikes, but today’s vote for a more gradual move is a sign of a measured approach.

Never underestimate the power to hedge short positions. We have seen many today in EUR / USD and others may follow – 1.15 is an important level that should be tested and surpassed. While many market participants hoped the ECB would recognize the rising price pressures, it was unclear how aggressive it would be given ECB President Christine Lagarde’s recent comment that the central bank did not need to act like the Federal Reserve. But she today she opened the doors to a creak by saying:

“Inflation is likely to remain high for longer than expected … Compared to our December expectations, the risks to the inflation outlook are on the upside, particularly in the near term.”

Above all, he added: “The situation has really changed”.

He did not reiterate that a rate hike this year is “very unlikely”.

According to ECB sources, a year-end rate hike is on the table. So, although the ECB left its policy unchanged, these not-so-subtle changes in the guidelines were significant enough to boost demand for the euro. The market now expects a tightening of 50 basis points by December.

Looking ahead, employment reports for the US and Canada are expected to be released on Friday. Despite the rally and rising Treasury yields, traders should be aware of the risks of a weak relationship. The slowdown in the services sector in January was partly due to weaker employment growth. The employment component fell from 54.7 to 52.3, the weakest level since October. This follows the first decline in private sector wage growth since December 2004, second. The four-week moving average of is also higher in January than it was in December, and the University of Michigan index fell to its lowest level in a decade. Although the manufacturing sector has added jobs and continued demand has decreased, this will not be enough to offset the downside risk. Economists expect nonfarm wage growth to slow to 150,000 from 199,000. A weak report might not discourage the Fed from tightening monetary policy in March, but it could certainly give euro-backed investors a stronger reason to sell US dollars.

Here are the arguments for a decline or increase in non-farm wages in January:

Arguments for an incorrect NFP report

  1. Decline of the ISM component of employment in services
  2. First decline in the ADP (PA 🙂 change of employment since December 2004
  3. Increase in average unemployment benefits claims in 4 weeks
  4. The University of Michigan Consumer Confidence Index reaches its lowest level in a decade.
  5. Drop in the consumer confidence index

Arguments for a strong NFP relationship

1. Reduction of permanent credits
2. Increase in the employment component of the manufacturing ISM
3. Challenger announces continued job cuts

Weaker employment growth is also expected in Canada. The job market has been very strong and has regularly held upside surprises in recent months. The Omicron scare and new restrictions are expected to result in job losses in the first month from May 2021.

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