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The first week of May promises to be rich in important events for the dollar and the U.S. markets. In the middle of the week there will be an FOMC Meeting and on Friday we will see data on the U.S. labor market.
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The publication of employment data in the United States is one of the most important events for the markets. The fact that this report is published very early and often differs considerably from expectations makes it all the more important. This discrepancy between expectations and reality usually evokes the strongest market reactions of any economic report and can set the trend for weeks to come.
The previous release was weak and gave rise to speculation on whether the Fed is too hawkish, with the economy creating 100K jobs per month instead of 200K, as was the case over the previous six months. However, over the past weeks, there have been a number of positive surprises for the U.S. economy, providing a boost for the dollar.
It is likely that a continuation of the trend in growth employment will help the U.S. currency and stock markets continue their recovery, after a few weeks of poor performance.
In March, employment only grew by 103K. Although this figure is weak, it occurred after the exceptionally strong February reading of 326K. On average, over the last 6 months, monthly growth has exceeded 200K, which indicates healthy growth for the U.S. economy.
In recent months, observers have also expressed concern about the persistence of the low rate of wage growth. Average hourly earnings grew 2.7% YoY, which is slightly above the 2.6% average for the whole of last year. However, it should be noted that the Beige Book of the Fed business increasingly highlights the rise in inflationary pressure and lack of manpower.
In addition, the labor market is becoming even tighter. The most recent data on weekly unemployment benefit claims continues the trend of perennial lows. The number of initial jobless claims fell to 209K last week, the lowest level since 1969, and three times lower than at the peak of the financial crisis. The number of continuing claims are also nearing lows not seen since the 1970s. If this situation in the labor market continues, it will likely lead to the acceleration of wage growth sooner rather than later. In fact, it is quite probable that we will already begin seeing signs of this acceleration in April.
There are also positive indications of economic growth on the results from the first quarter, which support the likelihood of a strong employment report. Data published on Friday showed that the rate of economic growth had accelerated to 2.9% YoY - very close to the target President Trump announced a year ago, which few believed was possible.
Thus, it is likely that in this week's publication, the focus will be on wage growth. If the data shows a noticeable acceleration, there may be an increase of bullish sentiment surrounding the dollar, as was observed in early February. The markets will not be impressed if the current rate of growth is maintained, however, it is unlikely this will cause a sell-off.
Additionally, after weak data last month, employment indicators will hold significant importance. A second month of weak data - near 100K - will raise doubts on the state of U.S. employment. This would be a highly unexpected development and may lead to an increased demand for the dollar, as doubt will also be cast on the Fed's ability to raise rates three times this year as planned.
For more analysis on how the Non-Farm Payrolls can affect the global financial markets, register for FxPro's free What's Moving the Markets? trading webinar, hosted by professional trader and industry expert, Phillip Konchar.
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