Today, all eyes will be on the US employment report for May. The forecast is for nonfarm payrolls to have risen by 185k, less than the 211k in April, but still a solid number that is consistent with further tightening in the labor market. We see the risks surrounding that forecast as tilted to the upside, considering that the ADP employment figure for the month came at 253k, notably above the consensus of 185k. The unemployment rate is expected to have remained unchanged, while average hourly earnings are anticipated to have slowed somewhat in monthly terms.
Despite some potential softness in earnings, we think that overall, this is likely to be seen as a solid report by FOMC officials, not least of which due to the unemployment rate that is expected to remain below the Fed’s estimates of full employment. Even though a June rate hike is almost fully priced in at this stage, with the Fed funds futures indicating a 96% probability for such action, we believe that a strong report could bring forward market expectations regarding the timing of the next rate increase and thereby, support the dollar.
As for the Fed, we think that even a modest disappointment in these data is unlikely to derail policymakers’ plans to hike in two weeks, since they may view any weakness as a blip along a solid employment trend. In addition, we have heard from a lot of FOMC members recently, and nobody gave any hints that they are uncomfortable with the elevated market pricing for a June hike, despite the recent streak of rather disappointing economic data.
EUR/USD declined somewhat yesterday after it hit resistance near the 1.1260 (R1) zone and during the early European morning Friday, the pair is trading a few pips above the 1.1200 (S1) support. Even though the price structure on the 4-hour chart still suggests a short-term uptrend, in case we get a strong employment report today, the latest pullback could continue. A break below 1.1200 (S1) could set the stage for further downside extensions and initially aim for the next support at 1.1160 (S2).
USD/JPY traded higher yesterday following the release of the encouraging ADP employment data, breaking above the resistance (now turned into support) barrier of 111.40 (S1). Strong US jobs data today could encourage the bulls to remain in control and push the price higher. A decisive break above the 112.10 (R1) resistance hurdle could pave the way for the 113.10 (R2) area.
As for the rest of today’s highlights:
During the European day, the UK construction PMI for May will be released. The index is expected to have declined, but remain above the crucial threshold of 50. Such a decline could hurt sterling somewhat, but we maintain the view that over the next week, market focus is likely to remain primarily on incoming election polls.
In Eurozone, the PPI for April is due out.
We also get trade balance data for April from both the US and Canada.
We have only one speaker on the agenda: Philadelphia Fed President Patrick Harker.
EUR/USD
Support: 1.1200 (S1), 1.1160 (S2), 1.1100 (S3)
Resistance: 1.1260 (R1), 1.1300 (R2), 1.1350 (R3)
USD/JPY
Support: 110.40 (S1), 111.00 (S2), 110.50 (S3)
Resistance: 112.10 (R1), 113.10 (R2), 113.80 (R3)
