US dollar turns to jobs report for more fuel

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The latest US jobs report will hit the markets at 12:30 GMT on Friday. Forecasts and business surveys point to another strong report, although there are signs that the labor market may be struggling. As for the dollar, the recent retracement still appears to be a correction in a larger uptrend, not a turning point.

Slowdown in recruitment? Not yet

Market participants are turning pessimistic about the economy, sensing slowing growth around the corner. Mortgage rates have skyrocketed in recent months and this has already started to impact the housing market, with home sales falling sharply in recent months.

Meanwhile, companies are warning they could lay off workers as they struggle to manage costs. Rising inflation threatens to eat into profit margins and many behemoths like Amazon and Facebook have already announced plans to freeze hiring.

And if this shift is happening in trillion-dollar companies, it is most certainly happening in smaller companies as well, where labor costs make up a larger share of total expenses. In other words, executives are eyeing a potential slowdown in the US and an even worse environment overseas, and so have started to play defensive.

On the bright side, it’s probably too early for all of that to show up in this data set since the change is just beginning. It’s probably a story for the summer.

Strong report expected

Non-farm payrolls are expected to reach 320,000 in May while the unemployment rate is estimated at 3.5%, which would be the lowest in five decades. The forecast is supported by the S&P Global composite PMI which showed another healthy increase in employment. However, unemployment insurance claims increased during the week of the survey, suggesting that layoffs are becoming more frequent.

If the employment data is strong overall, traders will focus on the wage component. Employment earnings are a retrospective measure while wages are considered a forward-looking indicator that can predict inflationary pressures. This is why the Fed and investors are paying particular attention to it.

Wage growth is expected to moderate, with the average hourly wage set to slow to 5.2% in annual terms from 5.5% previously.

Dollar trading playbook and outlook

In markets, the classic playbook is that the dollar tends to rise or fall on the jobs report depending on whether it was stronger or weaker than expected, then retrace the initial move within minutes. .

This has been a consistent phenomenon over the past couple of years – traders are smoothing out the initial spike. The nonfarm payrolls has essentially turned into an intraday volatility event, not something that can trigger entire trends like in the past.

Overall, the outlook for the dollar looks positive despite the latest pullback. The Fed intends to continue raising interest rates, and while the US economy appears to be losing steam, the situation in Europe and China is much worse. And if there is a global recession, it generally benefits the dollar as capital flows into the reserve currency.

Until the prospects for economic growth in the rest of the world start to improve, it is difficult to call for a reversal of the trend.

Taking a technical look at the Euro/Dollar, the pair appears to have been thrown off its 50-day moving average, which also suggests that the latest move was a correction and not a reversal. If the bears manage to get back below 1.0635, their next target could be the 1.0465 region.

On the upside, a return above the 50-day moving average and the 1.0780 area could open the door for another test of 1.0940.

Ahead of official jobs data on Friday, the ADP jobs report and ISM manufacturing PMI on Wednesday could give investors a taste of what to expect.

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