The upcoming U.S. employment number could make or break the trend for the dollar index. However, we may not see any significant change in the Fed's stance towards their monetary policy. A status quo by the Fed may not change things for the dollar
The S&P500 index locked in the longest losing streak for 2019 yesterday ahead of the most important economic data. The index recorded four consecutive days of losses. The equity benchmark lost nearly 0.8 percent, but it is up nearly 9.66 percent year-to-date. The Dow Jones index is up 9.20 percent YTD, but it is the NASDAQ index that is leading the way with a gain of 11.85% YTD.
The U.S. Non-Farm Payroll data is the most critical number for the global markets. The Federal Reserve bank makes its monetary policy decision based on this number. Of course, the bank also factors in other critical elements but the job market’s health trumps them all. The recent data for the US 4Q GDP provided much-needed assurance that the economy is slowing, but it isn't stalling. I believe that that the 1Q GDP is likely going to be underwhelming mainly due to the fact that the inventory bulge is often worked off and this could lead the reading below the 2 percent mark.
Nonetheless, the 4Q GDP reading was well ahead of the consensus estimate. The number came in at 2.6 percent against the forecast of 2.2 percent, beating the previous reading of -3.6 percent. Despite this strong reading, the Fed chairman, Jerome Powell, has maintained his stance towards the monetary policy. The Fed will continue to practice patience and it will continue to monitor the economic data closely before it starts the process of hiking the interest rates again.
The soft patch which we have experienced in the U.S. markets isn't that prominent in the U.S. labour market, which is fairly sturdy. Therefore, today's number has special meaning for the dollar index. The greenback index touched the highest level since December, and this is even though the Fed is continuously assuring the market that the bank isn’t going to rush to hike the interest rate. It looks like the market participants do not believe this.
So, the question is what is ahead for the dollar index?
I believe that the tone is set for a solid February jobs number and it is likely that we would see an increase in hiring, confirming the evidence of mounting wage pressure. This could lead the unemployment rate to return to its old trend, a lower unemployment rate. The 12-month trailing average of non-farm payroll has jumped from 173K p/m from January 2018 to 234K p/m in January 2019 while the average for the past three months sits at 241K.
The forecast for today’s nonfarm payroll change is 180K and any number below 150K would only set a bearish tone. A number above 240K would set a bullish tone and this could push the dollar index above the 98 mark.