Expect volatility in the markets following NFP announcement

The attention of investors now shifts to focus on the Non Farm Payrolls (NFP) data, which will be released on Friday 2 September at 12.30GMT by the US Bureau of Labor Statistics.  The NFP is considered the most important and influential economic report for the currency markets because it shows the number of paid jobs added or lost in the US economy in the last month, excluding the farming industry.

Why is NFP so significant? NFP data reveals the health of the US employment sector and provides an indication about the economic health in the US. The data is also closely observed by those in the Federal Reserve as they take the figures into account when deciding on monetary and fiscal policy. Strong job growth boosts consumers' confidence, which in turn increases consumer spending. High consumer spending can fuel growth, as it is the main driver of the US economy, and this also supports sectors such as housing, manufacturing and retail sales. The NFP therefore signals whether the world's largest economy is expanding or not, and at which pace.

Since the $600 billion quantitative easing (QE) programme ended in June, economic data has shown alarmingly weak figures at a time when the US economy was expected to be undergoing steady recovery. The latest housing market data and Manufacturing Index sank, while ADP Employment Change showed that only 91,000 people were employed in August. Consumer confidence was also disappointing, dropping to a 28-month low in August.

Will Friday's NFP data confirm that the US economy is in need of further aid? Risk aversion in the market remains high while investors continue to wonder whether the US is sinking further into a double-dip recession. The announcement last week of a planned two day monetary policy meeting in September at Jackson Hole left speculators unsure about whether a third round of QE will be deemed necessary. Following the release on Tuesday of the August FOMC meeting minutes, it seems that the Fed is leaving the door open for more easing to aid the economy. If economic growth is slow and fails to boost employment and consumer spending, then a third round of QE is likely to happen.

July's NFP was a lower than expected figure of 117K new jobs, however this month investors are expecting the August data to show the creation of 75,000 new jobs, and the unemployment rate to remain unchanged at 9.1%.

In the case of the NFP data registering significantly above expectations, the dollar may strengthen as this will be an indication of growth, and QE3 speculations will start to fade. We may also see gold fall, as heightened risk appetite decreases demand for the safe haven metal. If the NFP comes out close to but below expectations, we might witness a sell-off of the US dollar as this may indicate that the Fed will be more likely to decide at the September meeting to boost the economy using additional easing measures. If the NFP report reveals a significantly lower figure than anticipated, we may see the safe havens US dollar, gold and precious metals strengthen.  In either scenario, a high level of volatility is expected, which may lead to large price swings. It will certainly be an interesting day to trade the currency and commodity markets.

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