05/09/2014: Outlook ahead of Non-farm Payrolls

For a Non-farm Payrolls Friday, markets have been extremely active. The normal course of events involves European stock markets little changed on the day and forex pairs flat. However there has been an unusual amount of fluctuation in the forex markets, whilst indices are seeing some profit-taking. This comes as traders continue to evaluate the actions of the ECB yesterday.

So what does this mean for Non-farm Payrolls data this afternoon at 13:30BST? The headline number is expected to improve to 225,000 from August’s 209,000, whilst the disappointment in the ADP private payrolls yesterday (which have been a strong indicator in recent months) which fell slightly to 204,000 (220,000 had been expected) suggests that maybe the number will be a little light. However, with the Fed increasingly focusing on wage growth and slack in the economy, the average weekly earnings and the participation rate could be more of an impact. Average earnings growth was flat last month and is expected to improve to 0.2% growth. Any miss on this number could help to drive a retracement of yesterday’s moves.

However, in the wake of Mario Draghi and the ECB’s easing measures yesterday, traders are still trying to come to terms with the loss of over 200 pips on Euro/Dollar and around 120 pips on Cable. This makes today’s market reaction to the payrolls so much harder to predict. The fact is that several key forex pairs are now incredibly oversold. The RSI has reached extreme levels on EUR/USD (closed yesterday at 17.2) and GBP/USD (closed at 24.5) and both are now primed for a technical rally.

The big winner in all this though should be volatility which continues to rise. In the past two days there has been a huge spike higher in implied volatility on EUR/USD. Market reaction to Non-farm Payrolls today is unlikely to result in a reduction.

EUR   implied vol

 

I said yesterday that with such a huge fundamental event that technical levels almost become redundant. However, on Cable there is a huge support which has held so far this morning. The 38.2% Fibonacci retracement level of the 12 month bull run has held at $1.6280 almost to the tick. if this level is breached after the payrolls data, along with the February low at $1.6250 and December low at $1.6220 then there could be significant downside towards $1.6000 which is the 50% Fibonacci retracement.

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