It’s a decisive week for the US dollar as the NFP (Non-Farm Payroll) data is due to be released today, and expectations are somewhat bullish for the dollar.
However, when trading, one should take into account the fact that we’re trading a currency pair and not a single currency. That being said, we should consider the other currency that comes in a pair as well.
Wednesday’s PMI’s (Purchasing Manager Index) out of both the Eurozone and the United Kingdom came in at a spectacular 54 and 59 level respectively. This shows the services sectors are growing at a nice pace in both the Eurozone and UK, as both prints are well above the all-important 50 level.
When interpreting the PMI in any country one should look at the 50 level as being the line in the sand when it comes to recession or expansion. A PMI below 50 shows a contraction for that respective sector, while a print above 50 shows expansion.
This is important because the central bank is looking at this data in order to set the monetary policy, as expansion comes with rate hikes, so bullish for the currency, while contraction comes with rate cuts, so bearish for the currency.
As a comparison, the ISM non-manufacturing numbers in the United States came in at (approximately) the 56 level, with the employment component being steady. This supports a bigger than expected NFP this Friday.
If you compare the recent PMI’s in Europe and UK versus the United States, then the difference between the two is obvious, in the sense that in the United States the ISM is stalling at current levels, while in Eurozone and UK they are on a rising path.
Consider the fact that the Services sector has a heavier input into the GDP (Gross Domestic Product) and there you go, you have a bullish scenario for the local currency, namely the Euro and the Pound against the dollar.
Which currency pair should be the most interesting to trade and to benefit out of these two PMI comparisons? The answer is the USDJPY, as it is the currency that reacts the most when it comes to job data.
I am still favoring the upside on the USDJPY but the EURUSD and GBPUSD also look like they may make a move higher. However, a correction is due in both EURUSD and GBPUSD, so the plan is to buy any dip that may come with the NFP announcements today.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
