Markets brace for release of the NFP report today which will likely indicate deceleration in the pace of creation of new jobs compared to the previous month. However, market impact from a moderate downside surprise is seen limited as only serious slack in payrolls growth can trigger reassessment of the pace of the Fed policy tightening and force investors to price out some uber-hawkish tightening scenarios. EURUSD has resumed moving towards parity on confluence of two key near-term bearish risks: growing threat of a gas crisis in EU and potential upside surprise in key US macro report.The dollar continued to move up after breakout of 107 round level on the back of Euro and Cable sell-off. The S&P 500 index closed yesterday in positive territory for the fourth day in a row as “open mouth operations” of the Fed policymakers and June FOMC minutes released on Tuesday helped market players to play down US recession risks:The verbal interventions from Fed Bullard and Waller were limited to pointing out the market’s overblown fears of a recession and reassuring that the pace of policy tightening will not cause critical damage to the economy and positive economic growth rates will be maintained. However, index futures are trading slightly lower today pressured by NFP uncertainty.The headline reading of the report (Payrolls) is expected to show 270K gain in jobs, monthly wages are expected to rise 0.3%. The labor force participation rate was 62.3% last month and is expected to rise further. ADP report released on Thursday came out in line with expectations, with job growth estimated by the agency at 235K in June. Wednesday’s ISM services PMI showed that the pace of hiring in the sector has slowed compared to the previous month. The service sector makes up about 70% of GDP in the US.For expectations that the Fed will slow down the pace of policy tightening, job growth would have to be very low or even negative. In this case, markets will be forced to narrow expected policy divergence between the Fed and other major central banks which was the key driver behind latest dollar rally. In case of an upside surprise, in particular if job growth comes at 300-400K, it is likely that EURUSD will continue to move towards 1.00, and GBPUSD to 1.18 on realization that the gap between economic prospects of the US and European economies has widened even more.
Source: Tickmill
