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Market Analysis

Fundamental Analysis, USD: NFP Preview

March 08, 2019
BY Michael Stark

The dollar has been highly active since yesterday afternoon in the runup to today’s crucial NFP. An unexpectedly dovish ECB and very positive data from Japan caused some big movements for the greenback. This NFP preview looks back at the major events yesterday.

Euro-dollar tanked yesterday even below $1.12, this symbol’s lowest level since June 2017. Cable also moved down to around $1.30700, a high for the greenback in March so far. It was a loss for the dollar against the yen, though, to week lows below ¥111.

Dovish ECB and very positive Japanese data

The main event in currency markets generally yesterday was the unexpectedly dovish outlook from the European Central Bank. The ECB extended its plan for low rates into the end of 2019, and even indicated its willingness to lend cheaply to European banks sooner than expected.

The EU’s central bank downgraded its forecasts for the eurozone’s economy. The ECB cut its expectations for inflation, but the traders focused on the large downward revision of the GDP forecast. It had been 1.7% for 2019, but yesterday saw the ECB reduce this by a surprising 0.6%. Even famous hawks like the Bundesbank’s president Jens Weidmann supported the decisions.

Surprisingly strong pessimism at the ECB generated considerable downward pressure on the euro, leading to last night’s 21-month lows for EURUSD. There was a very slight recovery from the bottom at $1.11850, but American data yesterday had little impact on euro-dollar. Initial jobless claims met expectations almost exactly.

More surprises came this morning from Japan: GDP data not only reached but exceeded the consensus. The quarterly figure of 0.5% (against the previous 0.3%) is important, but the major surprise is the gain of 0.1% in annual GDP growth despite events last summer. Even household spending is up: this was an even bigger gain to 2.0% from the previous 0.1%, and quite against the expected negative 0.5%.

NFP preview

The releases of non-farm payrolls and other employment data from the USA this afternoon are likely to determine ongoing direction for the dollar. However, traders should not ignore Canadian employment change: this is also due out at 13.30 GMT today.

Consensus at the moment is for a figure of about 180-190k for the NFP itself. If accurate, this prediction would be most likely to lead to volatility in pairs with USD because it would be a significant drop from the previous 304,000. Meanwhile the USA’s unemployment rate is billed to drop marginally to 3.9%, although hourly earnings could increase slightly.

Limited gains might be in view for USD

Although the fundamental picture is positive for the dollar in most of its pairs, the technical side makes more big gains unlikely. EURUSD and GBPUSD are clearly in oversold territory, so it is difficult to suggest a repeat of yesterday’s movements even if the NFP is exceptionally strong. Despite this, some small overall gains for the dollar are possible, although traders should be cautious during this afternoon’s volatility.

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