Will Friday’s NFP continue the positive trend?

After a month of dramatic developments in the currency markets, investors are placing the spotlight on the most watched and highly anticipated US employment indicator, Non-Farm Payrolls (NFP), released this Friday 9 March at 13:30 GMT. Investors will be waiting to see if the recent improvement in US economic data is also reflected in the NFP figures. The NFP report is a crucial indicator for the health of the world’s largest economy as it reveals the number of paid jobs added or lost in the US economy, excluding the farming industry. A report that reveals a higher number of employed people indicates more economic activity, more demand for goods and services and thus an expanding economy.

US data signals a stronger US economy

While investors are expecting the US economy to show signs of solid recovery, Friday’s NFP report may influence sentiment in the market. A significant improvement in US December payrolls data may erase expectations for a third round of quantitative easing. But the absence of what is known as QE3 may be a catalyst for a US dollar rally supported by a heightened risk aversion in the market.

Economic data revealed that activity in the services industry hit a12-month high while US consumer confidence jumped by more than expected. Data also showed that Pending Home Sales increased by more than the market anticipated adding fuel to the view that the US housing market is improving. In addition, demand for US manufactured goods fell less than expected in January while Gross Domestic Product figures showed that the economy expanded by 3%. ADP Employment change was also revealed this week and it showed an unexpected improvement in the labor sector which may be an indication for Friday’s NFP report.

What did Bernanke say?

During his last speech, Federal Reserve Chairman Ben Bernanke acknowledged that the US economy is growing but the labor market is far from normal. He has not mentioned a third round of quantitative easing which made investors wonder whether the Fed will continue to buy more government bonds to keep interest rates lower. He said that unless growth accelerated, the stubbornly high unemployment rate would not keep dropping. Minutes from the central bank’s policy meeting on January released this month implied that further monetary easing would only emerge if the economic outlook worsened. Federal Reserve officials are looking for strong evidence in order to be convinced that the US economy has entered a self-sustainable recovery. Will Friday’s NFP support their hopes?

Will February jobs figures add to hopes?

Friday’s NFP report is expected to show another decent month for the labor sector for a second month with predictions of 207,000 new jobs added into the economy in February. The unemployment rate is expected to remain unchanged at a 3-year low of 8.3%. Confidence in hiring and growth has a significant impact on consumer spending, which is the main driver of the US economy, supporting sectors such as housing, manufacturing and retail sales. A positive jobs report may signal that the US economy remains on the path towards a strong recovery while the eurozone appears to be sliding into recession.

In the case of the NFP data revealing a close to or significantly above expectations figure, the dollar may find support as this will be an indication of growth and, subsequently, the need for further monetary easing will start to fade. If the NFP report reveals a significantly lower figure than anticipated, we may see the safe haven US dollar slide, as investors may be disappointed and hopes for growth may disappear. In either scenario, a high level of volatility is expected, which may lead to large price movements.

 

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