07 Sep 2018: NFP to drive dollar but trade remains a concern

NFP to drive dollar but trade remains a concern

September 7th: Highlights

  • Traders await crucial data
  • Sterling rallies on lack of Brexit news
  • German data weighing on single currency

Beware the freight train!

One of the first lessons I learned in trading was: do not stand in front of a freight train. In other words, if the market is reacting, let it. Every month I have to remind myself of these words as the U.S employment report is released.

I may not stand in front of the freight train, but I am free to judge if it is traveling in the right direction! The market feels that headline non-farm payroll data is a prime indicator of the strength or otherwise of the U.S economy no matter what I think. I see it as a set of estimates that are subject to such considerable review that most analysts simply use the six-month moving average as their median prediction.

For that reason, the consensus is for 190k new jobs to have been created in August and usually sane market traders are prepared to take positions based on whether the actual is above or below that figure.

The only crumb of sanity I can find is that, at least in recent times, the market has started to take notice of the wage data which accompanies the jobs number.

Wage inflation is a prime constituent of inflation and is a forward-looking indicator. In the past few months, wage increases have been consistent at 2.7% and the forecast is for no change in August.

This is also a pointer towards Q3 growth data. Were the economy to still be growing at around 4.1%, it is likely that jobs would be becoming scarcer and wages rising faster. So, we await thirty minutes of madness from 1.30pm BST and then we can get back to normal.

Yesterday, the dollar index fell to a low of 94.93 and is finding the 95.25 level to be pivotal once again.

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No news is, once again, good news

Over the course of Brexit, there have been several constants; the inability of the UK Government to come up with suitable proposals, the stoic refusal of the EU to compromise over anything, and the fact that Sterling rises during periods of Brexit “radio silence” in the forlorn hope that agreements are being forged behind closed doors.

So, it has been over the second half of this week following the entirely spurious report that the UK and Germany had come to some sort of agreement which was quickly denied by Berlin.

Regular readers will have picked up that I am not Mark Carney’s biggest fan since I feel that there is not as much substance to his reputation as he would like us to believe. His comments this week were a prime example. Of course, it is better to have the existing Governor remain in place through the entire Brexit process, but practical help towards a smooth Brexit? I don’t see it.

Yesterday the pound joined the euro’s recent path in becoming reactive, as it took a breather between bouts of Brexit driven mayhem. It reached a high of 1.2962 versus the dollar, closing at 1.2928, while it managed to reach 1.1142 versus the single currency, closing at 1.1122.

German slowdown coming?

As the Eurozone matures (remember it is only next year that the euro will reach twenty years of age) it is expected that individual states data will become less important to the overall picture of the economic health of the bloc.

That is, for now, a forlorn hope as it is firmly believed, to use a tired old metaphor, that if Germany sneezes, the Eurozone catches a cold. That may be true but since Mario Draghi continues to set monetary policy to “benefit the entire region” its importance should wane.

This week’s data from Germany has been weak as factory orders declined by 0.9% from an increase of 1.8% last month, the fourth decline in five months. Earlier in the week, German PMI’s were lower although the entire regions numbers held their own.

It is often forgotten that the Eurozone is a fledgling group which has been through the biggest financial upheaval in a century. It is a group of often widely disparate economies and is extremely diverse politically with nineteen members each often pulling in a different direction.

While the dollar has been dominant so far in 2018, next year could easily see the euro rise again as the promise of a normalization of monetary policy starts provided of course the economy doesn’t nosedive following Brexit.

Yesterday, the euro reached a low of 1.1605 versus the dollar closing at 1.1622. Today, after a quiet morning, it is likely to be reactive to the U.S. employment report.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”