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How Will Non-Farm Payrolls Affect June Rate Hike ?

The FOMC kept rates on hold on Wednesday which was in line with market expectations. The FOMC stated that the weak Q1 GDD is transitory and business investment firmed. The FOMC left the door open to a June rate hike in the statement.

Per the CME’s FedWatch tool, the probability for a June rate hike has increased to 69.1%. The dollar index broke through a significant resistance level at 99.00 taking market to a 2-week high of 99.33. During early European session on Thursday. USD/JPY hit the highest level of 112.88 not seen since March 20. The strengthening of USD weighed on gold prices with spot gold hitting the lowest level of 1232.92 not seen since March 21.

The crucial US labour market data for April will be released this Friday May 5, at 13:30 BST. It includes non-farm payrolls, unemployment rate and average hourly earnings. Please note that the release of US labour market data will likely cause volatility for USD, USD crosses and commodities.

Although the non-farm payrolls in March was disappointing seeing the slowest growth of 98K (a number not seen since March of last year). The unemployment rate in March of 4.5% was another figure not seen since May 2007. US unemployment has seen a downtrend since 2010 and has stabilised in a range between 4.6% – 5% since early 2016. Wages continue to show an upswing from early 2015. The Fed sees the labour market as close to full employment with Employers having to raise wages to attract workers in a tightening job market.

The ADP employment change released yesterday, regarded as the prediction of NFP, dropped to 177K in April from 255K in March, marking the slowest growth this year. The slowdown in April was mainly caused by declines in job creation in the construction and retail sectors. Conversely, the service and business service sectors saw noticeable job gains.

The average revised figure of non-farm payrolls in the past 6 months has been around 192K which is not far from the 180K estimate for April. The recent US economic data has been weak, such as the non-farm payroll in March, the Q1 GDP and auto sales etc. Therefore, If the upcoming non-farm payrolls is in line with or above 180K, accompanied by an upward revised previous figure, and a stable unemployment rate. then it will likely boost market confidence on the US economy and the probability for a rate hike in June.

Conversely, if the upcoming non-farm payrolls is far below expectations, accompanied by a downward revised previous figure, and a rising unemployment rate. Then it will likely increase market concerns on the economic slowdown and put more stress on the Fed to raise rates in June.

Be aware that, based on prior experience, market trends sometimes reverse within 1-2 hours after the initial move.

Fed Chair Yellen will make a speech at 18:30 BST on Friday at Brown University. The markets will be attentive to any comments she makes about the US economy.

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