Last week ended with a lot of good news for the United States Economy as Nonfarm Payroll, Unemployment and wage data reports turned out to be favourable much more than market anticipated.
Nonfarm Payroll (NFP) which measures the change in the number of people employed during the previous month in all sectors of the U.S economy, excluding the farming industry, private household workers and non-profit organizations stood at 209,000 exceeding the forecasted figure of 183,000. Employment gain for the month of June was also revised from the previously recorded figure of 222,000 to 231,000.
The U.S Economy got another boost on last Friday as unemployment rate dropped from 4.4% to 4.3% for the month of July – the lowest since May 2001. This makes the unemployment rate touch the most recent Federal Reserve Median forecast for 2017. As if that’s not enough, the decline in U.S unemployment rate has come at a time when the labour force participation rate is surging higher. The labour force participation rate rose by one-tenth percentage point to 62.9% whiles the share of the population that are employed surge to 60.2% – implying that the strength of growth in the job market is really high.
In order to be able to keep up with growth of the working age population, the U.S needs to create 75,000 to 100,000 jobs every month. The data on last Friday showed that the monthly growth in jobs this year alone averages 184,000, close to the 2016 average of 186,000. This makes it possible for average job growth by end of 2017 to exceed that of 2016 since 2017 is still “young”.
On wages, the average hourly earnings increased by 0.3% in July following a 0.2% rise in June, making the July growth the biggest rise over the last five months. And on a year-on-year basis, wages increased by 2.5%.
The Dollar index, which measures the strength of the greenback against a basket of six major currencies rose from 93.529 to 93.774 after last week’s job data announcement.
Despite these favourable Economic numbers, in my opinion, the greenback is not set for a rally anytime soon. I will instead interpret any gains in the greenback as a temporary pause in the weak dollar trend we have seen over the past months in the foreign exchange market. This is because, none of the factors that has been pressuring the dollar lower has changed after the strong U.S job numbers. These factors have been well existed, as such the greenback is not set for a sustainable rally anytime soon.
The U.S labour department reported that although the economy is near full employment, wage growth has not been strong enough because most of the jobs that are being created are in low-wage industries such as restaurants and bars – which added a total of 53,100 jobs in July.
To add to the above, further Federal Reserve rate hike this year is dependent on wage growth and inflation, not jobs. Historical data available shows that wage growth and inflation has slowed down over the last few months. In other words, the 0.2% and 0.3% growth in wages for the months of June and July respectively is not sufficient enough to boost inflation towards the Fed’s 2% target over the medium term.
The next factor contributing to the greenback’s weakness has been U.S Political Turmoil. Resilient payroll data is certainly not enough to reverse weaknesses in President Trump’s ambitious economic policies and anti-globalization initiatives. Investors have become less optimistic about key U.S economic stimulus promised by President Trump during the 2016 Presidential elections campaign. Tension between U.S and Russia on allegations about Russia’s interference in U.S 2016 polls continue to mount as Russia retaliates to U.S sanctions by announcing that the U.S must cut its diplomatic staff in Russia by 755 people, and that Russia could consider imposing further additional measures against the U.S in response to new sanctions approved by congress.
More importantly, is the Technical Price Action dynamics surrounding the U.S dollar against its major trading currencies. The Price Action Analysis below tells the story well.
EURO/DOLLAR CONTINUES TO SURGE HIGHER AMIDST GOOD U.S ECONOMIC NUMBERS: The Euro/Dollar has maintained its buoyant uptrend despite good U.S payroll numbers as bulls continue to dominate this market. The pair closed above the 1.1744 near term support at the end of the trading session on Monday, August 7th 2017. The underlying technical dynamics surrounding this pair shows that its uptrend is not ending anytime soon as major resistance is found within 1.2320 – 1.2568 resistance zone.
Better U.S economic numbers makes it easier for the European Central Bank (ECB) to tighten its policy. In that, good economic conditions in U.S can easily be transferred to the Euro zone. Additionally, Euro zone unemployment rate fell from 9.2% in May to 9.1% in June this year which has been its lowest level since February 2009. Key inflation figure also picked up in the Euro zone to a faster pace since 2013. In all, latest data supports ECB President, Mario Draghi’s recent assertion that reflationary figures are gradually replacing deflationary ones in the Euro zone.
SPOT GOLD MAINTAINS BULLISH BIAS: Spot gold which is traded against the U.S Dollar on the foreign exchange market also kept it bullish bias since it made a bounce from the 1204.35 support level on July 10th this year. The pair closed above 1254.06 near term support at the end of the trading day on Monday, August 7th.. At the moment, only a plunge below 1254.06 – 1243.69 support zone will clear away bullish sentiments in the spot gold market.
Author: E.O. ESSIEN