Pound / Dollar in Decline, can US Jobs Data Save GBP/USD? The Key Numbers to Watch

On Friday 7th July the Bureau of Labor Statistics is scheduled to release the June jobs report at 13:30 BST and the Pound to Dollar exchange rate (GBP/USD) could be in for some big moves is the data surprises.

The data comes as Sterling is seen to be suffering a bout of selling pressure thanks to an unexpectedly poor batch of UK economic statistics.

Next moves in the Dollar will now largely depend on the nature of US economic figures.

Watch what happens to average hourly earnings which are forecast to have increased by 0.3% as the US Federal Reserve tends to watch this figure for signs of underlying inflation in the economy.

However, it is the increase in private sector employment that will be of most interest.

The market is expecting a reading of 177k on the report's non-farm payroll component, which is above the 138k from May.

Analysts at brokers City Index say their proprietary non-farm payroll model is predicting a larger-than-consensus reading of 217k.

Such an outcome would be an all-out positive for the Dollar as the general rule of thumb with this data event is that a stronger payroll print = potential for higher interest rates at the Fed = a stronger Dollar.

Kathleen Brooks, Research Director at City Index, is looking for a stronger performance from the US jobs market owing to the hints dropped by the employment component of June’s ISM manufacturing release.

The component rose to its highest level since March confirming momentum in the economy has rebounded sharply in the second-quarter and this should be reflected in jobs numbers.

further, the Challenger, Gray & Christmas Job Cut Report, fell by 19.3% YoY in June which, "suggests that plenty of jobs may have been created in the last month,” says Brooks.

Why the Pound v Dollar Could be in for Movement

So, how will markets react to the data?

Firstly, if consensus estimates are met then don’t expect much movement anywhere in the financial markets. Trading is a game of reacting to misses on expectations, i.e surprises.

City Index have done a very simple correlation analysis to try and find which assets had the strongest correlation to the NFP report.

Although this analysis is far from perfect, the monthly correlations since the start of the year are as follows:

  1. USD/JPY and NFP: 0.77
  2. USD/GBP and NFP: -0.63
  3. USD/EUR and NFP: -0.26
  4. S&P and NFP: 0.01

“As you can see, the US stock index has no correlation with the NFP report, so stocks may not be worth trading around reports like this. Instead, USD/JPY and GBP/USD have the strongest correlations, which means that these FX pairs tend to move the most over an NFP release,” says Brooks.

The Pound has been in an uptrend against the Dollar since mid-June and has managed to break, but not hold 1.30.

A disappointing reading from the United States could well help massage the GBP/USD back above 1.30.

However, a miss could see the retracement from the rejection at 1.30 gain traction but we would expect weakness to be rather limited in this environment of broad-based Dollar weakness.

“Overall, we believe that the NFP report is important for the outlook for the Dollar, and if we get a strong reading for June then we could see the Dollar rally at the end of this week,” says Brooks.

However, others are not confident that the data will go the way of the Dollar.

Kathy Lien, Director at BK Asset Management notes ADP reported its smallest payroll increase since October.

4-week average jobless claims ticked up from last month as continuing claims rose to its highest level since mid April.

Consumer confidence is mixed, leaving Challenger's 19.3% reduction in layoffs as the only piece of data supporting stronger payroll growth since manufacturing jobs are a separate line item in the non-farm payrolls report.

As such, investors must contend with the following evidence says Lien:

Arguments for Stronger Payrolls

  1. Challenger Job Cuts -19.3%
  2. Employment Component of Manufacturing ISM Rises
  3. Consumer Confidence Rises to 118.9 from 117.6

Arguments for Weaker Payrolls

  1. Employment Component of Non-Manufacturing ISM Drops to 55.8 from 57.8
  2. ADP Employment Falls to Lowest Level Since October
  3. 4 Week Jobless Claims Average Rises to 243K from 239K
  4. Continuing Claims Rises to 1.956M from 1.929M
  5. University of Michigan Index Drops to 95.1 from 97.1