📢 Will NFP save US dollar?💲

NFP report for March will be release on Friday, April 1st at 1:30 pm BST

The US dollar experienced three quarters of appreciation but the most recent week surely was not one to remember by USD bulls. US yield curve inversion shows that risk of an economic slowdown or even recession is real. However, the US labor market holds firm suggesting that continued economic expansion is still possible. What should we expect from tomorrow's NFP release? Does the market still care about this data? What's next for USD, gold and US500?

Is there a scope for positive surprise?

Two latest NFP reports turned out to be positive surprises, what boosted odds for a hawkish reaction from the Fed to acceleration inflation. However, it is uncommon for an NFP report to beat expectations during three consecutive releases. Of course, expectations of 490k jobs increase are not prohibitive given an ADP reading that was in-line with expectations (455k). However, as ISMs have not been released yet (they will be released next week), we cannot use employment subindices to try to determine NFP reading for March.

Market expects a 490k jobs increase in March, slightly lower reading than a month ago. However, if the pace of job gains is maintained, employment should return to pre-pandemic levels by the middle of this year. Source: Bloomberg

While lack of ISMs makes defining expectations harder, regional indices may offer some help. Employment subindex in Philly Fed reading for March jumped to the highest level in history! Its correlation with the NFP report is quite high (spare for early-pandemic turmoil), what may suggest that we are about to see a strong NFP reading. Of course, NFP readings tend to be volatile but even disappointing reading below 400k should not discourage Fed from hiking rates by 50 basis points in May, especially if wage growth is sustained.

Employment subindex in Philly Fed index jumped to the highest level in history in March! Source: Bloomberg

Does data still matter?

Russia-Ukraine war and its implications are the main theme in the markets today. While war impact on US employment levels is likely insignificant, accelerating inflation is a different story and may impact employers' plans. However, we do not expect it to have a major impact on labour market report just yet. Moreover, as long as the labour market holds firm, US economy should hold firm as well

How will markets react?

EURUSD

USD was appreciating during the past three quarters but the most recent week brought a correction. However, this can be to some extent reasoned with a quarter-end rebalancing and USD may regain its shine afterwards. Of course, disastrous data that would change Fed's view on tightening could change the outlook for USD. Nevertheless, a disappointing NFP report from December did not change this view and we do not expect that potential NFP miss now will change it either. Current USD weakness and a potential negative surprise could create some trading opportunities on USD-cross, like for example EURUSD that trades at elevated levels.

Source: xStation5

GOLD

Divergence between gold and bond prices has been arbitraged away. Meanwhile, correlation between gold and USD weakened. Data on wage growth will be crucial for gold - high wage growth would point to further inflationary pressures, what may support gold prices due to its function as a store of value. On the other hand, a significant jump in yields, similar to the one from March 25, could exert pressure on gold prices.

Source: xStation5

US500

Markets started to look past the war in Ukraine. Indices are not as reactive to war-related news as the used to be. As a result, a key factors for US stock market going forward are likely to be inflation and a risk of rate hike-induced economic slowdown. Strong labour market would hint that economic expansion will continue. Key support for US500 can be found in the 4,575 pts. On the other hand, index broke above 61.8% retracement of the latest major upward impulse and invalidated the bearish setup.

Source: xStation5