Roaring dollar turns to nonfarm payrolls - Forex News Preview

The US employment report for September will hit the markets at 12:30 GMT Friday. It will single-handedly decide whether the Fed pushes the taper button next month. As for the dollar, it has sliced through its rivals lately as investors searched for shelter from the stock market storm. The bigger picture remains positive in an environment where the Fed normalizes faster than the ECB and BoJ, and with the American economy being shielded from the global energy crisis. 

Crises everywhere

It’s a good time to be the world’s reserve currency. From paralyzed supply chains to an energy crisis that has engulfed Europe and Asia, markets are grappling with a variety of risks that threaten to hamstring economic growth and simultaneously keep inflation hot for longer. 

With investors playing defense and the US economy insulated from the global power crisis thanks to its self-sufficiency on energy, the dollar has reclaimed its throne as king of the FX market. 

The other element that has turbocharged the dollar is market pricing around the Fed. At its latest meeting, the central bank signaled that if the next employment report is solid, it would get the tapering process rolling in November. 

Policymakers were split evenly on whether rates should be lifted next year already, but markets seem more confident as the first rate increase is now almost fully priced in for December 2022. 

Solid jobs report? 

Turning to the upcoming dataset, nonfarm payrolls are forecast to have risen by 450k in September, pushing the unemployment rate down one tick to 5.1%. Wage growth is expected to have picked up too, with average hourly earnings projected to reach 4.6% in yearly terms from 4.3% previously. 

Labor market indicators were mixed during the month. Employment growth accelerated in the ISM manufacturing survey, but it slowed down in the services sector, which accounts for a much bigger part of the economy. Likewise, the Markit PMIs showed that job creation picked up, but remained subdued by historical standards. And while the ADP jobs report overcame expectations to clock in at 568k, it is not a reliable predictor of nonfarm payrolls. 

As such, the risks surrounding the NFP forecast seem balanced - it’s difficult to call for either a large positive surprise or a massive disappointment. An employment report that’s roughly in line with the forecasts is unlikely to move the needle for the dollar. What usually happens in such cases is a minor spike that fades almost instantly - just volatility without a clear direction. 

Dollar outlook still bright

In the bigger picture though, the outlook for the reserve currency remains positive. With bond yields rising across the world because of inflation concerns, the dollar is the last remaining defensive hedge across markets, as neither bonds nor gold nor the yen are attractive in this environment. 

Meanwhile, the US economy remains solid and is heavily shielded from the worsening energy crisis, which will impact Europe and Asia much more. Consumption has been strong, the labor market is healing quickly, and Congress will likely deliver another multi-trillion spending package soon to recharge the recovery. 

All this allows the Fed to taper its asset purchases and ultimately raise rates, something that could put even more upward pressure on US yields, making the dollar more attractive against low-yielding currencies like the euro and yen over time. 

The risk is that the Fed gets cold feet because of the global environment turning darker and delays its normalization plans. But if the situation gets bad enough for this to happen, the markets would probably be in panic mode and safe-haven demand for the dollar might remain elevated, keeping any losses to a minimum. 

Taking a technical look at dollar/yen, a potential break above the 112.10 region could open the door towards the 113.70 zone. 

On the downside, a violation below the 110.80 level might bring into play the 50-day moving average, currently at 110.07. 

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.