A month ago, a stronger-than-expected wage growth of 2.9% y/y raised concerns about the acceleration of inflation. Now, much depends on whetherthe signal will be confirmed in the February data. The forecasted increase of 0.2% m/m should seal Fed’s interest rate hike in two weeks, but it may not be enough to give a clear boost to USD.
Traditionally, this is not a change in employment, but average wage growth will be in the focus. The January report brought a strong 0.3% m/m increase in wages, which raised the annual dynamics to 2.9%, the highest since the financial crisis. This aroused fears that inflationary pressure is stronger than previously thought, and the Fed may have more room for monetary tightening. Despite this, it is worth remembering that January’s data were partly inflated by one-off factors, namely worse weather conditions limited the number of hours worked, which reduced the share in the statistics of the least-earning people (settled on an hourly basis). In February, better weather should bring the opposite effect, being a risk of a lower than expected result (0.2% m/m, 2.8% y/y). In addition, there are strong base effects (an increase of 0.3% m/m in February 2017) and possible revisions down the January data. A drop in the annual dynamics below 2.8% is the most serious risk for the negative receipt of the report. Taking into account the recent clear increase in US Treasury yields, expectations regarding the Fed’s policy path and the dollar’s recovery, the market will now be more sensitive to disappointment. In case of stronger data, the path to a more hawkish valuation of the US assets is limited — the market fully discounts the increase in the Fed’s funds rate in March, and with the expectations for the rest of the year may wait until the FOMC meeting on March 20-21. Hence, we think that good data may not be enough to give a clear boost to the USD.
Let’s now take a look at the EUR/USD technical picture on the H4 time frame. After the second test of the level of 1.2446, the price dropped towards the middle of the trading range and stopped around the level of 1.2298. Currently, the market participants await the NFP Payrolls data and the price is still trading above the technical support at the level of 1.2257. In case of better-than-expected data, the market should dive towards the key technical support at the level of 1.2150. Otherwise, the golden trend line will be tested and possibly broken as the price will rally higher to test the recent swing high at the level of 1.2555.