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Trade opportunity of the week: US NFP

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This Friday we see the latest installment of the monthly US Non-farm payrolls (NFP) report, which is arguably the biggest economic release in the whole calendar. The employment data for the month of February will be potentially even more significant than usual, as the rising inflationary environment in the US may lead to a faster pace of monetary tightening than is currently expected by the markets.

The Federal Reserve meet for the second time this year on the 15-16th March, and whilst very few expect an interest rate hike to be announced, any comments that allude to increases in the not too distant future could have a major impact on financial markets. The latest CPI and PPI data from the US suggest that the stabilizing prices half of the Fed’s dual mandate is on track, and if this Friday we see a strong jobs number then there remains little reason to believe that the current probability from the market of a rate hike before year-end of 58% isn’t overly pessimistic.

From the Bloomberg terminal, you can see that the average estimate is for 194k extra jobs to have been added in February. This would mark a stark increase on last month’s 151k, and maintain the 4-month moving average above the 200k mark. A print in this region (180k+) or higher would signal continued strength in the labour market of the world’s largest economy and be supportive of the US dollar, whilst applying downward pressure to Gold and Bonds. As far as stocks are concerned it’s hard to be sure; on the one hand strong employment should be supportive of the stock market, however the potential impact of a better print raising the path of hiking for the Fed could weigh on indices as their returns become relatively more expensive.

Alternatively if we see a bad miss in this number (150K or lower) then it may have the opposite impact on markets; the US dollar may weaken whilst Gold and Bonds rally. Either way, this number nearly always sees a sharp spike higher in volatility and lots of movement following its release which can lead to significant changes of trend for some markets and provide great trading opportunities.

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