What To Expect For Tomorrow’s NFP?

July’s NFP data exceeded the consensus but as expected the positive reaction of USD did not last a long time. Considering how often Fed mentioned that they were not worried about employment and reaching the inflation target was their priority before July’s release limited USD movements. Should we expect anything different from August numbers?

We need to look at the developments that happened since last NFP. During the first half of August main theme in FX space was consolidation. Pairs kept moving in their horizontal trading ranges with the exception of a few spikes on some data.

With some FOMC members mentioning how they need to think about raising interest rates before it’s too late to reduce the risk exposure one more time fueled rate hike speculations towards the second half of the month.

Finally Yellen spoke at Jackson Hole symposium where she mentioned the case for an increase in federal funds rate has strengthened in recent months. Although she hasn’t provided any clues regarding the timing of it, her statements were enough for DXY to move to 96 level in the last week of August.

Looking at historical data we see that August NFP numbers are usually lower than the consensus. That was the case for the last 5 years and generally it is not considered as a red flag.

The time frame that August NFP numbers cover is usually the time when most people go on holidays and it’s easy to see the temporary impact on data. In addition we see 12 month average came down to 200K from 250K in almost 2 years. However that too is not worrisome either.

Especially for developed countries’ economies it’s harder to bring down employment ratio 1 percentage point for instance from 10% to 9% than it is to bring it down from 7% to 6%.

Thus, we can draw a conclusion by saying that even if the NFP numbers are below consensus (unless it’s an extremely low number like it was in May) USD may continue its recent trend.

We know FOMC prioritizes inflation while deciding on monetary policy moves but we can’t ignore the role employment plays. Higher interest rates have a negative impact on domestic demand and employment is the key to offset that. Fed Vice Chair Stanley Fischer in his recent comments mentioned that USA is getting close to full employment level.

“Full employment” is an economic state where – in theory – all labor resources are used in the most efficient way possible. To put it more simply, anyone who is looking for a job (assuming it’s a realistic job search – we can’t all be astronauts) will find one.

Again August NFP numbers shouldn’t change markets’ expectations on interest rate hike. If the number is lower than the consensus we could see temporary USD shorting but that wouldn’t be enough to change the big players’ mindset.

On the other hand, positive numbers might help USD gain further strength against other currencies.

EUR/USD

EUR/USD Daily Chart

Looking at the EUR/USD daily graph we see that the uptrend that started on 25th of July ended on August 18th. 50% Fibo retracement of that move is around 1.1155/60 and as the pair continues to stay below that level 1.11 area (Fibo 61.8% retracement) and 1.1040 (Fibo %78.6 retracement) can be targeted with the help of positive NFP numbers. It is also possible for the pair to test 1.09 area before September’s FOMC meeting.

Even if we see below consensus NFP the downward may continue after a short term upward spike especially after seeing (on August 31st) how CPI and core CPI for Eurozone is respectively at 0.2% and 0.8%. 1.1200/10 area where the linear regression channel and Fibo 38.2% retracement is sitting may act as the first short term resistance level. In case this resistance is violated Fibo 23.6% retracement around 1.1265 seems as a harder obstacle to overcome.

RSI on daily graph is around 42 and shows that there is more space for the pair to keep going down. Pair may go for a short covering if RSI comes close to extreme oversold levels. The last time daily RSI went below 30 was at the end of November of 2015. 100 DMA (red line) also technically supports the continuation of downward movement.

GBP/USD

GBP/USD Daily Chart

GBP/USD has been staying in a consolidation channel for the past two months since Brexit. Positive NFP numbers may force the pair to test 1.28 level. In case that support is violated, 50% Fibo expansion of Brexit fall around 1.24 level could be the next target. 1.33 area where Fibo 23.6% retracement is located can hold as a strong for a resistance for a while. 50 DMA is still staying below 100 DMA. RSI is close to 50 area and seems neutral at the moment and can stay around that level until NFP numbers are released.

It will be difficult for GBP to gain back the value following Brexit against USD since BoE and Fed are to follow different paths as far as their interest rate policy is concerned. BoE is expected keep expanding its monetary base to offset the negative impacts of Brexit in future meetings.

USD/JPY

USD/JPY Daily Chart

USD/JPY is staying close to 50% Fibo retracement of its last downward movement around 103.40 area. With a decisive move above that resistance pair may target 104.10/20 area where Fibo %61.8 retracement of the same movement and Fibo %38.2 retracement of major downfall that started towards the end of January and lasted for about 6 months is located (red horizontal line).

Also the fact that the pair is above its 50 DMA is also support continuation of upward movement. 101.20 area where 20 DMA and Fibo %23.6 retracement is located is the first short term support that may attract the buyers again in case of a downward consolidation.

BoJ is one of the other major banks that signal more expansion in near future. Latest comments from government and BoJ officials show that they leave the door open for more interest rate cuts further into negative area.

XAU/USD

XAU/USD Daily Chart

The pergence XAU/USD showed on daily graph was followed with a break of 1335 support where Fibo 23.6% of the latest upward movement is located. Daily graph show that prices are around the lower line of the Bollinger Band also CCI is correcting oversold reading -220 but still stays below -100.

Both of these indicators show that gold is getting ready for its next move and is more likely to continue its recent weakness against USD. 1290 and 1270 levels (Fibo %50 and Fibo %61.8 retracement) may be targeted in case of a positive USD reaction to NFP is received. 1335 area (Fibo %23.6 retracement) is the first short term resistance.

However we need to keep in mind that usually gold is considered as a traditional safe haven and with interest rate hike expectations may have negative impacts on stock markets which may eventually cause a higher demand for safer Gold. That may make it harder for USD to gain value against XAU compared to European currencies or JPY.

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