EURUSD: Trading The U.S. Non-Farm Payrolls Report

By David Song, Currency Analyst

Trading the News: U.S. Non-Farm Payrolls

What’s Expected:

Time of release: 0 7 /0 6/ 2012 1 2 :30 GMT, 8:30 E D T

Primary Pair Impact: EURUSD

Expected: 95K

Previous: 69K

DailyFX Forecast: 85K to 120K

Why Is This Event Important:

The world’s largest economy is widely expected to add another 95K jobs in June and a positive development may increase the appeal of the U.S. dollar as it dampens speculation for additional monetary support. As job growth gradually gathers pace, the pickup in employment should limit the Fed’s scope to implement another round of quantitative easing, and we should see the central bank continue to soften its dovish tone for monetary policy as the recovery gets on a more sustainable path. In turn, we will maintain our bullish outlook for the greenback, and the upward trend in the USDOLLAR may continue to take shape in the second-half of the year as the FOMC moves away from its easing cycle.

Recent Economic Developments

The Upside

Release

Expected

Actual

ISM Non-Manufacturing – Employment (JUN)

--

52.3

ADP Employment Change (JUN)

100K

176K

Challenger Job Cuts (JUN)

--

-9.4%

The Downside

Release

Expected

Actual

U. of Michigan Confidence (JUN F)

74.1

73.2

Personal Consumption (1Q F)

2.7%

2.5%

Advance Retail Sales (MAY)

-0.2%

-0.2%

As the recent developments coming out of the U.S. economy highlights an improved outlook for the labor market, there’s certainly a good chance of seeing an above-forecast print, and a larger-than-expected rise in NFPs could produce fresh 2012 lows in the EURUSD as it maintains the downward trend carried over from the previous year. However, the drop in consumer sentiment paired with the slowdown in private sector consumption may drag on hiring, and a dismal print may renew expectations for QE3 as the Fed keeps the door open to expand policy further.

Potential Price Targets For The Release

The technical outlook for the EURUSD remains bearish as the downward trend continues to take shape, and the pair looks poised for further declines as it carves out a lower top around the 1.2745 figure. In turn, we anticipate to see fresh yearly lows in the exchange rate, and the euro-dollar may make a run at 1.2200 should NFPs curb bets for more easing. However, a dismal employment print may trigger a sharp selloff in the dollar, and the EURUSD may face range-bounce prices throughout July should the report fuel speculation for additional asset purchases.

How To Trade This Event Risk

Expectations for faster job growth certainly casts a bullish outlook for the greenback, and the market reaction may pave the way for a long U.S. dollar trade as market participants scale back bets for more QE. Therefore, if NFPs increase 95K or more in June, we will need a red, five-minute candle following the release to generate a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in an effort to lock-in our gains.

However, the ongoing slack in private sector activity paired with the slowdown in household consumption may continue to drag on hiring, and a dismal NFP print may in still a bearish outlook for the greenback as it fuels bets for additional monetary support. As a result, if the report falls short of market expectations, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the U.S. Non-Farm Payrolls report has had on USD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY 2012

06/01/2012 12:30 GMT

150K

69K

+120

+106

May 2012 U.S. Non-Farm Payrolls

U.S. Non-Farm Payrolls increased 69K in May to mark the slowest pace of job growth since May 2011, while the jobless rate unexpectedly advanced to 8.2% from 8.1% as discouraged workers returned to the labor force. Indeed, the much weaker-than-expected print dragged on the dollar, with the EURUSD climbing above the 1.2400 figure, and the greenback struggled to hold its ground throughout the North American trade as the pair ended the day at 1.2430.

--- Written by David Song, Currency Analyst