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US non-farm payrolls preview – What to expect of EUR/USD?

FX_IDC:EURUSD   EURO / US DOLLAR
US non-farm payrolls report due today is expected to show the pace of job additions in May only slightly improved. The NFP figure is seen around 160K, largely unchanged from April figure of 160K. The unemployment rate is seen dropping to 4.9% from 5.0%, while average hourly earnings growth is seen slowing slightly to 0.2% m/m from April figure of 0.3%. That amounts to annualized figure of 2.5%.

Focus on wage growth

Though NFP is still dominates the wires, the fed rate hike decision and consequently, trading calls are more dependent on wage growth figures. This is because labor market tightening is well known and priced-in and the Fed is now more interested to see if the labor market gains are translating into higher income as only then consumption would spike.

Hence, whether or not USD moves higher depends mainly on wage growth figures. An in line with estimates or a higher than estimates wage growth number could strengthen USD. Drop in unemployment rate and NFP figure around 160K too could add to USD strength.

However, if wage growth figures disappoint, dollar would take a beating. In such a case, strong NFP and drop in unemployment rate cannot rescue the dollar.

An important point worth noting is.. 160K would have been a horrible number a year ago. But since labor market pool is shrinking fast, NFP number or a good NFP number could continue to fall as we move ahead.

Price action in EUR/USD

  • Pair witnessed exhaustion as it neared long standing Fibo resistance at 1.1236 (38.2% of 1.0463-1.1714) yesterday and fell below 1.1196 (38.2% of 1.0517-1.1616). Prices ended below rising trend line (blue) yesterday and has failed to take out the same today in Europe.
  • The spot currently trades around 1.1140 levels.

Outlook

  • Spot appears on track to test 1.11 levels (also rising trend line black) given the bearish price action in last 24 hours.
  • Strong US wage growth figure could also trigger a bearish break below 1.11 handle.
  • On the other hand, a weaker-than-expected wage growth number could open trigger a reversal in the pair from 1.1140-1.1160 range and thus lead to a formation of inverse head and shoulder formation as pointed out here – EUR/USD: possible inverse head and shoulder set up
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