USD: Will Jobs data justify another Rate Hike? NFP Preview

USD: Will Jobs Report justify another Rate Hike? NFP Preview

The U.S. Dollar (USD) eased further on Friday, extending losses from the previous session following the passage of the debt ceiling bill by the congress. Traders turn their focus to the monthly payroll report for more clues on Fed’s next move.

The possibility of a Federal Reserve rate hike on June 14 depends on Friday’s jobs report. However, only an extremely impressive report might lead to another increase in interest rates. Market expectation still points to a 25 bps rate hike this month, unless labor market cools down.

The upcoming jobs report could play a crucial role in determining whether the central bank decides to halt its 14-month campaign of raising interest rates, as it is one of the final pieces of data to be considered before the Fed’s June meeting.

Despite concerns about the debt ceiling and the highest interest rates since the turn of the century, US economic data has remained strong and may force the Fed to reconsider their plan to pause rate hikes after a 25 bps increase last month. Although Fed Vice Chair nominee Jefferson favored skipping a rate hike at the June meeting, the latest economic data may make it necessary for the Fed to raise rates.

In the past few days, the probability of a pause increased following public statements from Philadelphia Fed President Patrick Harker and Fed Governor Philip Jefferson expressing support for it.

The chances of a rate hike decreased after Patrick Harker, the president of the Philadelphia Federal Reserve, stated on Wednesday that he prefers to skip a rate hike in June but is willing to consider one in July.

NFP Preview

The Non-Farm Payrolls (NFP) report will be released later today at 1:30 p.m. GMT. The report is anticipated to show an slower increase in new jobs and a monthly rise in wages of 0.3%. The U.S. economy is expected to add 193,000 jobs in May, lower than 253,000 jobs added in April.

Hourly earnings is set to ease from 0.5% to 0.3% on a monthly basis, while maintaining its annual growth at 4.4%. Meanwhile, the unemployment rate is seen ticking up 0.1% to 3.5%.

Let’s now analyze the primary indicators that predict the upcoming significant employment report. Only three key data points are watched as the ISM Services PMI report will be released after the NFP report.

  • The Employment component of the ISM Manufacturing PMI increased to 51.4, from 50.2 in April.
  • The new jobs reported in the ADP Employment report came at 278,000 jobs, higher than expected and slightly lower than the 291,000 jobs reported last month, which was revised downward from 296,000 jobs.
  • The 4-week moving average of initial unemployment claims has decreased 2,500 from 232,000 to 229,500, according to the latest data released on Thursday.

According to the monthly Job Openings and Labor Turnover survey, the labor market remains strong. In April, the number of job openings increased unexpectedly by 358,000 compared to the previous month, reaching 10.103 million.

The total number of hires slightly increased to 6.115 million, while separations (which include quits and layoffs) decreased by almost 5% to 5.7 million.

So, what can we expect? Based on the leading indicators, it is expected that the NFP report for this month will show a slightly higher reading than anticipated, which will revive expectations for another rate hike.

Generally, a reading between 200K and 250K, or higher, will be bullish for the USD, unless unemployment and earnings disappoint. Lower than 200K job gains might put further pressures on the greenback towards the 103 handle. 

It’s essential to pay attention to other components of the report, particularly the average hourly earnings and unemployment. These aspects of the report are just as crucial as the headline jobs reading.

USD extends losses away from its 2-month high

The US Dollar Index (DXY), which gauges the USD against a basket of six major currencies, dropped below the 104 mark, settling at 103.42, down by 0.13%. Dovish comments made by several Fed’s officials earlier this week favoring a pause put the greenback under pressures on Thursday.

Meanwhile, the U.S. Congress approval of the debt ceiling bill helped to ease market concerns about a default, causing investors to dampen demand for the safe haven assets including the USD. 

On Thursday, the U.S. Senate approved a bill that raises the government’s debt ceiling, which had previously been set at $31.4 trillion. This came after the House of Representatives had already passed the same bill the day before.

The bill will be sent to the White House for President Joe Biden’s signature. This will prevent a default that the Treasury Department had warned about if the Congress did not take action by June 5.

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