Today is the most important day of the whole month for market players as today we will get to see the latest reading of the US NFP data. This economic reading commands the most attention among investors and traders. The economic data sets the trading tone for today and influences it for the rest of the month. As always, the Fed will watch this data very closely, and it is highly likely to influence their monetary policy decision.
US and European stock futures are trading lower ahead of this data. Traders are going to take a very cautious approach ahead of the US NFP data. Generally speaking, there is minimal volume in the markets ahead of this data as the action tends to happen only after the economic reading. Market players expect the US NFP number to produce another set of strong readings, which could only push the US dollar index higher.
The dollar has picked up strength against the Euro, Japanese Yen, British Sterling, and other G10 currencies. The dollar’s move against the Japanese yen is the most important as traders know that the BOJ will not hesitate to intervene again if the yield on the Japanese bonds begins to soar. As for the GBP/USD, the dollar’s strength matters the most as we do not think that the BOE is going to increase the interest rate again this month, but the Fed will. In terms of the EUR/USD, the ECB still has a long way to go before it begin to talk about hiking interest rate, so the dollar’s strength matters the most.
The US NFP data will be released at 13:30 BST, and the forecast for the number is 492K, while the previous number came in at 678K. The US unemployment rate is also expected to fall further to 3.7%. The previous reading was at 3.8%, and the Average Hourly Earnings m/m is expected to increase to 0.4% from its previous reading of 0.0%
The Market Playbook
Now the important part and how this is going to impact the markets. Well, the range of US NFP estimates for today’s number is wide, and it is expected to be anywhere between the 400K to the 600K mark. But we think the most important number is 500K. Meanwhile, anything lower than 250K, could throw the stock market out of balance and the Fed. That’s because if the number comes out below the 250K reading, market players will begin to question the current aggressive stance from the Fed. Remember, the Fed has said that they are not bound to increase the interest rate by 50 basis points only or even if they are heading in the right direction. Basically, a soft number will make the Fed question its current monetary policy as the Fed may not want to tighten the monetary policy while economic conditions are deteriorating.
On the flip side, if we see a number that is better than the market expectations, the Fed will feel comfortable with their monetary policy. They are likely to adopt a more hawkish monetary stance and an interest rate hike of 50 basis points will be more likely.
For the dollar index to gain more momentum and the stock market to continue its uptrend, we need to see a strong reading today. This means that the US NFP reading needs to be above 650K.
Such a scenario may be optimistic for the stock market, as the traders will only feel comfortable with a hawkish monetary policy if economic conditions are strong. If stock traders see that economic health isn’t improving but losing steam while the Fed holds on to a hawkish stance, it could spell trouble for the stock market.
Gold’s price has been flirting with a 50-day SMA on the daily time frame for the past number of days, and it seems like bulls are struggling to keep their head above water. We have seen gold prices soaring during the past few weeks, mainly due to the adverse geopolitical conditions in Ukraine. Those tensions are still very much under control as it seems that Russia is withdrawing its troops from Ukraine but only regrouping them. Gold traders are keeping a close on these political tensions and making sure they have an adequate hedge in their portfolios. Having said that, something which worries them is the hawkish monetary policy stance by the Fed, and a strong number by the Fed today is likely to push the dollar index higher and gold price lower. The Fed is serious about controlling inflation now, and as a result, they are adopting a hawkish monetary policy.
Today, the gold price is expected to remain volatile, and it is likely that we may see wild swings in the gold price. If the US NFP reading disappoints today, we are likely to see the gold price sharply moving to the upside. However, if the number comes in extremely strong, which means above 500K, we could see further weakness in the gold price.
The near-term resistance for the gold price is at 1953, while the support is at 1860.
In the crypto space, Bitcoin bulls are giving up on the current momentum as the price has failed to break above the 50-day SMA on the daily time frame. The 50-day SMA is trading near 47K, which isn’t the main resistance; the meaningful resistance for the BTC is at 50K.
Now one big question is how Bitcoin will react to the US NFP data? Well, Bitcoin has started to behave a lot more like a riskier asset which means when a risk-on rally is on, we do see the bitcoin price rallying as well. In other words, Bitcoin has developed a strong correlation with the stock market, and when the stock market moves higher, we also begin to see more birds coming for the Bitcoin price. In the absence of a risk-on rally, Bitcoin’s price begins to move lower. So, a disappointing US NFP number isn’t going to bring a rally for Bitcoin.