Will today’s NFP extend the dollar’s strength?

Investors are turning the spotlight on to today’s Non-Farm Payrolls (NFP) announcement, the most highly anticipated US employment evaluation report, which will be released today at 12:30 GMT. They 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, excluding the farming industry. The higher the number of employed people, the higher the economic activity will be, resulting in a heightened demand for goods and services and thus an expanding economy.

US economic data confirms a stronger US economy

As the economic recovery gradually gathers pace, today’s NFP report may influence sentiment in the market. In the case where NFP reveals a significantly improved figure, expectations for more stimulus by the Fed may start to fade. But the absence more quantitative easing (QE3) may be a catalyst for a US dollar rally, supported by heightened risk aversion in the market.

Recent economic numbers revealed that both the ISM Manufacturing Index and non-Manufacturing Index improved last month. Also, Durable Goods Orders, Home Sales and Consumer Confidence showed further signs of improvement. ADP Employment change was also revealed this week and it showed an unexpected improvement in the labor sector, which may be an indication for today’s NFP report.

QE3 expectations fade after the FOMC minutes

Minutes from the Fed’s March monetary policy meeting released this week dampened expectations for a third round of quantitative easing in order to boost growth as policymakers appeared less willing to launch stimulus measures. Federal Reserve officials noted the recent improvement of the economy, but they are now looking for strong evidence in order to be convinced that the US economy has entered a self-sustainable recovery.

During his last speech, Federal Reserve Chairman Ben Bernanke acknowledged that the US economy requires a more rapid expansion in order to help the jobs sector recover. He also said that despite the recent encouraging signs, the labor market has a long way to go in order to fully escape recession. Will today’s NFP report signal a rapid economic expansion?

Will March jobs figures continue the trend?

report is expected to show an improvement in the labor sector for the fourth consecutive month with predictions of 203,000 new jobs added into the economy the previous month. The unemployment rate is expected to remain unchanged at a 3-year low of 8.3%. A positive jobs report may dampen the Fed’s scope to push through another asset purchasing program in an effort to support the economy.

In the scenario whereby the NFP data reveals a close to or significantly above expectations figure, the dollar may extend its strength 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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