Market alert - Will the NFP report show a strong rebound?

• Market expectations point to a very strong NFP report for March
• 9.5 million jobs are still lacking compared to the pre-pandemic situation
• Vaccinations and reopening of the economy should positively affect recovery of the labour market
• EURUSD, US2000 are two key markets to watch

The publication of the most important data of the week - the NFP report will take place on Good Friday, despite the fact that many markets are closed. However, the Wall Street session will take place. The currency market and cryptocurrency CFDs also work normally. The commodity market for the most part will be closed.

Vaccines and lifting restrictions

Biden lived up to his promise in terms of vaccinating nearly a third of the US population. Vaccinations increase public sentiment and significantly reduce the number of new COVID-19 cases, leading to a faster recovery. Texas, for example, lifts almost all restrictions, and people reappear in bars, restaurants and cinemas, which increases employment in these sectors.

The US population may be fully vaccinated by mid-year. Source: New York Times

Good February data

February data beat market expectations, which was probably related to vaccinations and loosening of restrictions. This trend can be expected to continue. It is worth noting that since October last year, the negative trend in employment not only accelerated, but also the data negatively surprised many times. We are currently seeing a revival.

Many sectors have not recovered from the decline in employment seen in March and April last year. Increased vaccinations should restore employment in the sales and restaurant sector. Source: Macrobond, XTB

Weather conditions are improving

It is worth remembering that in February we witnessed a real winter attack in the United States, especially in the South, where such weather turbulence was unlikely to take place. All of this could have had a negative impact on employment back then but  now that effect has faded away.

Lower number of applications for unemployment benefits and ADP

Recently, unemployment benefit claims have fallen to their lowest levels since the start of the pandemic. Additionally, there are suspicions that the recent extension of federal benefits may have slightly distorted the data and may not fully show the actual improvement in the labor market. With more vaccinations, special pandemic benefits are unlikely to be extended. In turn, the ADP report slightly disappointed compared to expectations, although the reading came in above 500,000, which is the highest reading since September.

How might the market react?

EURUSD

One should certainly expect a positive report for the economy. Nevertheless, the strength of the market reaction will depend on the level of the data itself. Certainly, strong employment growth should work in favor of the dollar, although the dollar has been really strong in recent days and profit taking cannot be ruled out. On the other hand, a very negative reading could in turn lead to a rebound from the key support. However, this is not the baseline scenario.

Yields in the US rose to almost 1.8%, which pushed EURUSD significantly below 1.1800 level. An important support in the form of the  38.2 Fibonacci retracement is currently being tested. In March, the pair recorded the largest decline since May 2018. At that time, short-term support was located at 1.1530. It is worth noting that EURUSD is no longer extremely overbought according to the COT. Source: xStation5

US2000

Significant employment growth should be a sign that the economy is improving, which could lead to a further rebound of the Russell 2000 index, which is mainly cyclical. Moreover, Biden has recently announced a major infrastructure project that should be positive for the companies included in the index. Nevertheless, disappointment with the reading may pull the S&P 500 index down from 4,000 pts level, which could lead to a potential strong correction of the Russell 2000 index.