US jobs report: All eyes on wages – Forex News Preview

Marios Hadjikyriacos, XM Investment Research Desk

The US will release its all-important monthly employment report for February, on Friday at 1330 GMT. While forecasts point to yet another healthy month in terms of jobs added, investors are likely to focus primarily on the wage numbers, to gauge whether higher inflation is indeed just around the corner. How wages evolve will likely be critical for market expectations regarding how many hikes the Fed may deliver this year and thus, for the dollar’s forthcoming direction.

The US economy is projected to have added 200k jobs outside of the farming industry in February, exactly as many as in January. The unemployment rate is anticipated to have ticked down to 4.0% from 4.1% previously, which would mark a fresh low last seen in 2000. Last but not least, average hourly earnings are projected to have slowed slightly to 2.8% in yearly terms, from 2.9% in the previous month.

Overall, this looks like yet another strong report, which is not surprising; the US labor market has been on a tear for years now. The US economy has added jobs at a robust pace while the unemployment rate has steadily declined, stoking speculation that Americans may be set to enjoy a pay rise as companies start having difficulties finding skilled personnel and need to raise salaries to attract talent.

Wage growth is extremely important for central bankers and investors around the globe, as it is considered a precursor to inflation. In an environment where wages are rising, firms faced with rising labor costs will have to raise their own prices to compensate, or see their profits fall. Therefore, once wages begin to accelerate, inflation is expected to follow suit.

This theory fits in nicely with recent market moves. Back in early February, an upside surprise in US wages raised speculation that inflation may be set to pick up, and that the Fed may have to respond by raising interest rates more aggressively, in order to “reign in” price pressures. The result was a surge in US bond yields, as well as a modest recovery in the dollar – which up until that point was plunging. This narrative puts even more emphasis on the upcoming set of data. Investors will be watching closely to see whether last month’s acceleration in wages was just a fluke, or a sign of things to come.

At the time of writing, market pricing and the Fed’s own rate projections for this year are almost exactly in line. In December, the FOMC signaled it is likely to deliver three quarter-point rate hikes in 2018, and markets have so far priced in two hikes fully, while they also see a 92% probability for a third one, according to the Fed funds futures. In case these data come out stronger than anticipated – particularly on the wages front – that would likely seal the deal for three hikes this year, and may even raise speculation for a fourth. The dollar would likely benefit in such circumstances, with dollar/yen possibly aiming for a test of the 107.20 resistance area, marked by the peaks of March 1. If the bulls are strong enough to overcome that hurdle, then sell orders may be found near the 107.90 level, which is the high of February 21.

On the flipside though, if the data disappoint, for instance with wages slowing by more than expected, then the dollar would probably soften as markets become more skeptical about a third hike. Dollar/yen is likely to tumble and initially test the 105.20 zone, which is the March 2 low. Further declines below that barrier would mark a forthcoming lower low on the daily chart, and could be a signal for steeper declines. In this case, support may be found near 104.30, which is the high of September 2016.

Finally, it should be noted that the Bank of Japan’s policy gathering early on Friday could also impact price action in dollar/yen, ahead of the US jobs data.