Will Non-Farm Payrolls Drive EURO to 1.10?

Investors continued to buy US dollars ahead of Friday’s non-farm payrolls report. Federal Reserve Chairman Jerome Powell’s optimism was reinforced by non-farm productivity and factory orders which improved from the prior period. Although jobless claims ticked higher, the 4 week moving average is low on a historical basis, paving the way for a strong jobs report. One of the currencies hit the hardest by US dollar strength has been euro and if tomorrow’s labor market numbers beat expectations, we could not only see EUR/USD fall to 1.11 but reach 1.10 in the weeks to follow. Eurozone data on the other hand remains weak with German retail sales falling in March and manufacturing activity revised lower. Although the index for the Eurozone as a whole improved, if the region’s largest economy does not follow, the region’s recovery won’t be sustainable. This fear extended the slide in EUR/USD today and leaves the pair at risk for further losses.

The US non-farm payrolls report is not the only reason why Friday will be big day for EUR/USD. The advance estimate for Eurozone CPI in the month of April will also be released and if price pressures ease, we could see an early breakdown in the euro. The European Central Bank doesn’t’ have any room for a rate cut but they’ve made it clear that there will be no rate hike until mid 2020. Softer inflation could lead to more generous TLTRO terms in June. In contrast, a good US labor market report could renew expectations for tightening.

Every month, we look at a few indicators to help us handicap non-farm payrolls and this month, we have ADP, jobless claims, continuing claims and consumer confidence favoring a stronger report. We expect about the same amount of job growth in April as in March but what should really help the dollar is wage growth. Average hourly earnings should pickup after slowing the previous month. With jobless claims falling to 5 decade lows in early April, the tightness of the labor market should drive up earnings. As long as non-farm payrolls exceeds 160K and average hourly earnings rise by 0.3% or more, EUR/USD will fall and USD/JPY will rise towards 112. If wage growth falls short, EUR/USD will rally in relief.

Arguments in Favor of Stronger Payrolls this Month

1. ADP Jumps to 27K from 151K, Highest Since Feb 2017
2. Jobless Claims 4 Week Moving Average Falls to 212.5K from 214K
3. Continuing Claims Falls to 1.67M from 1.71M
4. Consumer Confidence Rebounds in April

Arguments in Favor of Weaker Payrolls this Month

1. University of Michigan Consumer Sentiment Index Declines
2. Challenger Layoffs Rises 10%
3. Sharp Drop in Employment Component of ISM

Meanwhile for sterling traders, the Bank of England’s lowered inflation projections overshadowed Governor Carney’s positive comments and GDP upgrades. The central bank now sees inflation ending the year at 1.6%, well below their 2% target. They also lowered their inflation forecasts for 2020. While they upgraded their GDP forecasts and expressed confidence that inflation and demand will rise strongly in 2 or 3 years time, the lack of price pressures now will keep the BoE on hold for the foreseeable future. According to Carney, investments will continue to suffer from Brexit uncertainty. He says if their forecast (which is predicated on a Brexit deal) is correct rate hikes will be needed and more than what’s currently priced into the curve. These hawkish comments set the BoE apart from the ECB, RBA, BoC and RBNZ. They may not be ready to raise interest rates right now but these they are confident that the next move in rates will be higher.