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.

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.

Positioning is another reason why the dollar could fall if the jobs report is not good enough. Investors have had plenty of time to position for and take profits on the U.S. recovery trade. With everyone expecting strong job growth, there are few buyers on the sidelines. However, the primary reason why the U.S. dollar is unable to rally is because investors are turning their focus to the global recovery. Vaccinations in the euro area are gaining traction and it won’t be long before restrictions are eased. Even with much of the region on lockdown, retail sales growth beat expectations in March. Euro was the best performing currency on Thursday.

The Canadian dollar is also trading strongly ahead of their own labor market release on Friday. CAD rose to its highest level against the greenback since September 2017. Unlike the U.S., Canada is expected to report job losses after some very good months of job growth. Economists underestimated job growth in Canada for the last 2 months and traders expect the same in April. There’s a good chance Canada shed jobs last month given the lockdown in major cities but the decline may not be as large as the -175K forecast. Keep an on eye on USD/CAD and CAD/JPY as they could see some big moves on Friday.

While euro was the day’s best-performing currency, sterling was the worst. GBP crashed after the Bank of England left interest rates and their QE target unchanged. They slowed the weekly pace of asset purchases and expressed confidence in the recovery but traders were disappointed by their emphasis on keeping rates unchanged until signs of full capacity utilization and 2% inflation is clear. BoE economist Haldane voted to reduce asset purchases but he is stepping down in June.