NFP Preview US jobs report unlikely to boost beleaguered dollar

The first official US jobs data for 2018, covering January, will be reported on Friday morning by the US Department of Labor. Consensus expectations are pointing to an anticipated improvement in non-farm payrolls (NFP) over December’s disappointing outcome. Around 180,000 non-farm jobs are expected to have been added to the US economy in January following a worse-than-expected showing of 148,000 jobs added in December.

In the run-up to Friday’s jobs release, the US dollar has continued to trade just above last week’s new three-year low against a basket of other major currencies. In January, the dollar posted its worst monthly performance since March of 2016.

Even a more hawkish Federal Reserve, which upped its verbiage on rising inflation expectations after concluding its latest FOMC meeting on Wednesday, was unable to sustain any meaningful boost for the heavily pressured dollar. Overall, higher expectations for rising interest rates – as indicated by US Treasury yields at new multi-year highs and an increasingly hawkish outlook from the Fed – have not benefitted the greenback, as negative sentiment continues to prevail.

Therefore, the question remains as to what factors may be able to prompt a meaningful near-term rebound for the beleaguered dollar, given that even higher interest rate expectations have been unable to do so. A likely catalyst for such a dollar rebound might be any sharp, sustained drop for the high-flying euro. What is unlikely, however, is that Friday’s jobs report will make much of a significant positive impact on the dollar, even if it happens to beat expectations. The impact of jobs data on the dollar is closely tied to how the employment landscape may affect Fed monetary policy. And as noted, the Fed has already been telegraphing an increasingly hawkish stance without any lasting positive reaction from the dollar.

In contrast, another worse-than-expected data outcome on Friday could potentially prompt a substantially negative reaction from the dollar, given the persistent bearish sentiment that continues to exist.

Current NFP Expectations

As noted, the consensus expectations for Friday’s headline non-farm payrolls data point to around 180,000 jobs added in January. The January unemployment rate is expected to have remained low and steady from the previous month at 4.1%, while average hourly earnings are expected to have increased by 0.2% after the previous month’s in-line 0.3% increase.

Jobs Data Preceding NFP

Key employment-related releases preceding Friday’s official jobs data have shown a mixed employment picture overall, but January’s ADP private employment report came out substantially better than expected. The ADP release revealed a solid 234,000 private jobs added in January against a prior forecast of around 185,000. It should be kept in mind, however, that the ADP report is usually not a very accurate pre-indicator of the official NFP jobs data from the US Labor Department, and sometimes even misses the mark dramatically. For December, the ADP data initially showed a stellar gain of 250,000 private jobs, far beating expectations, whereas the official NFP data subsequently showed a worse-than-expected 148,000 jobs added.

Other pre-NFP indicators include the ISM manufacturing PMI employment component, which showed expanding job growth at 54.2 in January, albeit significantly slower than December’s 58.1 reading. For the services sector, the ISM non-manufacturing PMI will be released on Monday, after Friday’s jobs report, and will therefore not be included as pre-NFP input.

Finally, January’s weekly jobless claims have mostly been better (lower) than expected, and have remained near historic lows.

Forecast and Potential USD Reaction

With consensus expectations of around 180,000 jobs added in January, our target range falls right around 160,000-180,000, given the mixed pre-NFP data inputs. Any result falling above this range may give the US dollar a boost, but as mentioned previously, the positive impact is likely to be muted. An outcome falling within or slightly below the range, in contrast, would likely extend the bearish sentiment that continues to plague the greenback. Finally, any reading that falls well below the range should make a strongly negative impact on the dollar.