Friday, November 2, 2018

Dollar retraces ahead of the Non-Farm Payrolls, indication of impending weakness?

  • Dollar
  • Gold
  • Euro
  • Pound
  • Stocks
  • NonFarm Payrolls


The Dollar declines across the board one day before the release of the Non-Farm Payrolls report casting doubts over its outlook going forward. The Pound was among the gainers of the day yesterday rallying above 1.30 on the back of hawkish remarks from the Bank of England. Gold takes advantage of Dollar's weakness and rallies higher while Oil continues to trend lower.

The most interesting question this morning is why did the Dollar decline? There's a number of reasons that forced the greenback lower against its peers: fresh bearish US data, a decline in Treasury yields, an improvement in risk appetite and doubts regarding today's employment figures. Taking one thing at a time, the manufacturing ISM data was yet another piece of domestic figures that printed softer this month, highlighting the recent weakness seen in several sectors in the States. On top of that, US bond yields moved to the downside creating a wider spread between US rates and those of the rest of the global economies further reducing the demand for the US currency.

More importantly though, the improved risk sentiment allowed the likes of the Euro and the commodity dollars to trend higher on the back of President Trump's comments on China. The US President said that he's engaged in a conversation with the Chinese side and this helped equities and higher beta currencies climb, putting the Dollar under pressure. Finally, the US NFP data is one of the reasons why traders opted to take profit on their greenback trades: analysts are expecting a robust reading in the employment data today but with a series of softer reports from the US in recent weeks the risk for the NFPs is to the downside.

As we mentioned yesterday, if any of the components of the US labor market report misses today the Dollar will come under more downside pressure. The key number for jobs added stands at around 200k but if the actual printing comes in lower or wage growth slows down the greenback may be in for a deeper correction. In our recent reports we have called for an impending weakness for the Dollar towards the end of the year and today's NFPs may be the trigger. Still, even in case the report prints in line with expectations we would be cautious over the greenback extending its gains further due to the number of fundamental factors we mentioned above.

The Pound was the best performing currency yesterday rallying above 1.30 on the back of the Bank of England rate decision and press conference. If though the BoE didn't change its policy, it was Governor Carney's remarks that spurred the Pound higher. Carney reiterated his view of the economy but at a time when Brexit negotiations are still ongoing he also spoke about the possibility of raising rates in the future. should the Brexit transition goes smoothly. This was enough to prompt traders to reduce their short exposure on the Pound and push it higher. Given the doubts regarding Dollar's outlook, we may see this rally going all the way to the 1.31 mark.

Gold started November on a positive footing recovering from its recent decline to trade as high as $1,235 yesterday on the back of Dollar's weakness. We need to highlight that the fact that Gold managed to remain above the $1,215 support during its pullback is an indication of bullish bias and if the Dollar goes into a retracement phase, as discussed above, Gold may shine again. A break above the $1,240 highs will expose the $1,250 and $1,260 levels in extension. Oil continues its free fall and the next area of support is found around the $62 mark.

Equities are set for a positive ending to the week with the European and US futures trending higher. The improvement in risk appetite helps stocks trend higher but the focus will equally be on the NFP data. A strong printing will help equities extend their gains but a miss may highlight weakness in the most robust sector of the US economy: the labor market. In any case, the London opening is pointing higher so the first part of the day up until the NFPs will be a bullish one.


  • US Non-farm Payrolls - 4.30pm
  • US Unemployment Rate - 4.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research