Why is a new report on the US labor market more important than the previous ones?

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Monthly data on the number of people employed in the US non-farm sector, as a rule, have a strong impact on the dollar and other major currencies of the world. The Friday report could play an even more important role. Due to the celebration of Independence Day, many traders in the United States left for the weekend, and trading volume in the market was reduced. The process involves mostly younger players who are unlikely to make large-scale transactions.

The June report on the state of the labor market is extremely important because the Fed has openly hinted at the possibility of reducing the rate, and including the timing of easing policy, will depend on the data. If the growth in the number of jobs does not reach forecasts, then investors will immediately begin to prepare for lower rates this month. Despite the fact that the market lays an absolute probability of easing policy in July, a moderate decline in the dollar indicates their uncertainty and unwillingness to reduce rates. Weak employment figures could lead to a collapse of the US currency.

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There is one reason why the US dollar is now stronger than it could be. The fact is that experts predict a recovery in the growth rate of the number of people employed this month. This was repeatedly said by officials, in particular, the head of the Federal Reserve Bank of St. Louis, James Bullard. Recall that the May report was extremely alarming. Back then only 75 thousand jobs were created, wage growth slowed, and this trend was recorded for the third consecutive month. Yes, the US economy is slowing down, but it's hard to imagine that less than 80 thousand jobs have been created in the country for two months straight months. Nevertheless, the dollar should be in lower positions, given the recent drop in Treasury yields. On Wednesday, the 10-year Treasury yield fell to its lowest level in 2.5 years.

If you pay attention to leading indicators, the prospects for the labor market are mixed. Indeed, the ADP reported a more rapid increase in the number of people employed in the private sector, but the figure did not reach market forecasts. According to ISM, the number of people employed in the service sector grew more slowly than last month, but in May, the company mistakenly predicted strengthening, so the estimate for the current month may be a correction after the past. The mood in the markets has become worse, and the monthly average figures for the number of applications for unemployment benefits have increased. The main reason for expecting a positive report is poor performance in the previous month.

How data will affect currency pairs

In case of growth in the number of employed by 165 thousand and an increase in wages by 0.3%, EUR/USD, AUD/USD and NZD/USD will become the best currency pairs for trading. The ECB is not yet ready to cut rates, but the chances of easing policy by the end of the summer are very high. Banks in Australia and New Zealand clearly signaled the need for further rate cuts. The softest position of these two regulators makes the aussies and kiwis vulnerable to a correction against the background of good US employment data.

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If we see the figures from 135 thousand to 165 thousand, but at the same time the data for the last month will be revised upwards, the greenback's reaction will depend on the growth rate of wages and the level of unemployment. On good performance, the dollar in conjunction with the euro will go up.

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The greenback will also rise in price in pairs with Australian and New Zealand dollars. In this scenario, the USD/JPY quotes will grow, but this pair is less attractive. The fact is that traders may doubt how strongly a moderate increase in indicators will affect the decision of Fed officials.

There is another scenario: an increase in the number of employed by less than 135 thousand without accelerating the growth of wages and a significant revision of the May data. In this case, the USD/JPY and USD/CHF pair will be suitable for trading. The first one is likely to fall below 107, and the second can plummet below 0.9750. With the release of mixed data on the labor market (employment growth will accelerate, but wage growth will slow down or unemployment will rise), the dollar's response will depend on which of the changes will be the most unexpected for the market.

The material has been provided by InstaForex Company - www.instaforex.com