Will NFP report seal decision on QE taper ❓

Global markets have seen a lot of action recently. Oil and natural gas rally have pressured stocks as markets became afraid of the negative impact high energy prices may have on growth and inflation outlook. However, the big event of the week - NFP report for September - is still ahead of us. This release looks to be more important than previous ones as it may have a big impact on Fed's policy moves, especially on the future of asset purchases programmes.

Why is the upcoming jobs report important?

While jobs market reports from the United States are always big market events, NFP report that will be released tomorrow (1:30 pm BST) is somewhat more important than usual. Fed said during its latest meeting that if the situation on the labour market continues to develop as expected, an official taper announcement will be made in the coming months. While nothing is set in stone yet, recent upbeat ADP releases and solid reading of ISM employment subindices paint a positive picture ahead of Friday's release. Market expects NFP report to show an addition of 470k jobs in September and a drop of unemployment rate from 5.2 to 5.1%

Hints from ADP and ISM employment indices

While the ADP report has not always been a good predictor of NFP readings, the report for August correctly predicted the direction of beat/miss in NFP data. Moreover, ISM manufacturing employment subindex has climbed back above the 50 threshold in September signalling that more than half of survey respondents increased employment in the previous month. Subindex for the services sector moved slightly lower compared to August but still remains in the expansion territory.

• ADP: 568k vs 428k expected

• ISM manufacturing employment: 50.2 vs 49.0 previously

• ISM services employment: 53.0 vs 53.7 previously

There is a growing feeling among market participants that a solid reading of tomorrow's NFP will seal the decision on taper with an official announcement coming at a meeting in November. This of course does not need to be the case as Fed may still find an excuse to continue with its massive asset purchases for a few more months. Nevertheless, market moves are driven by expectations and beat in NFP data will make the market expect a taper announcement next month.

A look at EURUSD and GOLD

Should NFP beat expectations and markets start positioning for winding down of Fed's asset purchase programme, US dollar may catch a bid. Treasury yields will also likely move higher and it would put a pressure on precious metals. A negative reaction from the stock market may also be on the cards in such a scenario.

EURUSD has been trading lower for some time already, mostly because of the US dollar strengthening. The pair is attempting to recover from a recent drop to 14-month low (1.1525) but downtrend structure remains intact. A move above the upper limit of the market geometry at 1.1607 would be required to spark hopes of trend reversal. Solid NFP reading would create a risk of retesting recent lows with a possibility of a drop towards the 1.1500 mark, where the 50% retracement of the post-pandemic upward move can be found.

Source: xStation5

Moving onto the GOLD market, we can see that the price of the precious metal has recently climbed above the downward trendline. However, instead of launching a strong upward move, gold started to trade sideways between $1,750 and $1,766. Note that the upper limit of this trading range is also marked with the upper limit of the Overbalance structure so according to this methodology, downtrend on the gold market is not over yet. NFP beat could pressure gold price as it would boost odds of Fed tightening its policy soon. In such a scenario, near-term support can be found at the aforementioned $1,750 handle but given recent elevated volatility on the gold market, a drop towards recent lows near $1,722 may be on the cards as well.

Source: xStation5