FX Breakouts Or Fake Outs? It Rests On NFPs

This is a big week for currencies but so far, we’ve seen nothing but consolidation. In today’s trade, the greenback strengthened against the New Zealand dollar and Swiss Franc, weakened against sterling and the Canadian dollar, and was unchanged against the euro and the Japanese Yen.

U.S. dollar banknote with map

Image Source: Unsplash

The Federal Reserve’s Beige Book report confirmed what investors already knew – which is that the economy grew at a faster pace in April and May. There was little response to this report because the main focus is non-farm payrolls on Friday. The economy is improving but job growth slowed significantly in April. If hiring fails to pick up in May, currencies, and equities will be in trouble.

The hesitation in stocks is a sign of overall investor concern. U.S. equities ended the day unchanged extending a multiday consolidation that could mark a top. For that to happen, the jobs report would need to be ugly. Earlier this week we learned that manufacturing activity accelerated but the dollar fell because manufacturing job growth expanded at a slower pace. Tomorrow, the ISM non-manufacturing report will be released. If the service sector fails to report a meaningful pickup in jobs, traders could sell dollars in fear of weak NFPs. If ISM is good, we could see renewed demand for dollars as traders position for a strong rebound in jobs on Friday.

The US jobs report is one of many important releases this month that could set the stage for big FX moves. Updated economic projections are scheduled for release from the Federal Reserve and the European Central Bank. Upgrades are expected for inflation and growth forecasts but what investors are really watching for are hints of taper. The Bank of England, Bank of Canada, and the Reserve Bank of New Zealand have made their first moves either in the form of fewer asset purchases or projections for an earlier rate rise. The U.S. economy is expanding just as if not more quickly than the U.K. and Canada but they’ve been reluctant to alter their forward guidance.

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