Why A Strong Jobs Report May Not Help The Dollar

Non-farm payrolls are due for release on Friday and the U.S. economy is expected to add nearly a million jobs. If NFPs rise by 978K, the current consensus forecast, it would be the strongest month for job growth since August of last year. The U.S. dollar should be trading higher on these lofty expectations but instead is mostly lower.

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There are a number of reasons for this lack of enthusiasm that could affect how the dollar reacts to NFPs on Friday. While there’s no doubt that the U.S. recovery gained momentum over the past month with many businesses adding new workers not all signs point to accelerated job growth. The employment component of manufacturing sector, for example, slowed for the fifth straight month and there was no significant decline in jobless claims. While this won’t take much away from Friday’s jobs report, it reduces the possibility of a blowout number.

ISM services and ADP also fell short of expectations. Job growth in the services sector grew at a faster pace but service sector activity slowed. All of this has dollar bulls worried that NFPs could fall short of expectations especially since the whisper number is above a million.

Arguments in favor of strong payrolls

1. Rise in employment component of ISM services
2. ADP Rises by Highest level since Sept 2020
3. Challenger reports 22.9k layoffs down from 30.6k
4. 4 week moving average drops to lowest since March 28, 2020
5. Consumer confidence rises to highest level since March 2020
6. Sharp rise in University of Michigan Consumer Sentiment Index

Arguments in favor of weak payrolls

1. No significant improvement in continuing claims
2. Employment component of manufacturing ISM grows at slower pace for 5th straight month

For a broad-based post NFP rally, we need to see non-farm payrolls above 1 million, upward revision to March numbers, unemployment rate at 5.8% or better AND positive average hourly earnings growth. All of the boxes need to be ticked for USD/JPY to resume its rise to 110 and EUR/USD to drop to 1.20 especially since good numbers are widely anticipated.

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