Trade War Fears Make Way For U.S. Employment Report

The US dollar surged against major pairs on Thursday. Trade war anxiety has subsided with the market awaiting the data from the U.S. non-farm payrolls (NFP) to be released by the Bureau of Labor Statistics on Friday, April 6, at 8:30 am EDT. The greenback is on the rise despite a larger-than-expected weekly unemployment claims number due in part to the strong gain in private payrolls reported earlier in the week. The data point to watch on Friday will be the hourly wage component as it is used as an inflation indicator by the Fed. The market has priced in two to three rate hikes this year, but higher inflation could validate Fed members' comments of four rate hikes in 2018.

• US forecasted to have added 188,000 jobs
• Canada expected to add 20,000 positions
• Investors to look for higher US wage growth

Dollar Caught Between Protectionism and Strong Economy

The EUR/USD fell 0.32 percent on Thursday. The single currency is trading at 1.2239 ahead of the NFP report. Employment data continues to be one of the pillars of the US economic recovery. The number of jobs has taken a backseat to the wages paid as a more telling indicator on the Fed's next step. U.S. Federal Reserve Chair Jerome Powell chaired his first Federal Open Market Committee (FOMC) in March and announced a 25 basis points rate hike as expected. Inflation has not risen, but hawks within the central bank expect it to happen sooner rather than later which is why they want to lift rates now.

European data was uneven this week. PMIs in the EU were close to forecasts or slightly below, but it was the unexpected 0.7 fall in German retail sales that hurt the euro followed by another disappointing inflation estimate. The silver lining for the single currency has been the lack of traction of the US dollar as it struggles with trade war developments. China was on the offensive this week retaliating against US tariffs. The US has also increased its offensive by seeking the support of Europe and Japan to launch a WTO complaint on intellectual property violations against China.

Pound Softer After Service PMI Miss

The GBP/USD fell 0.54 in the past 24 hours. The currency pair is trading at 1.40 after the UK's Service PMI came in at 51.7. The index was below the forecasted 53.9 and shows a shrinking confidence from British purchasing managers in the Services industry. Earlier in the week, the construction PMI was also below forecast and only manufacturing PMI was able to beat the estimate. Some of the drops have been suggested to be the result of bad weather.

The momentum of the dollar ahead of the biggest employment release of the month combined for a weaker pound. Interest rate hikes from the Fed are likely to come in at least twice more while the Bank of England (BoE), while not dissuaded by weather-related issues, could go as early as May for the second time in 10 years.

Canadian Jobs to Support Loonie

The USD/CAD lost 0.07 percent on Thursday. The currency pair is trading at 1.2756, very close to where the level seen at the Asian market open. NAFTA optimism has given the loonie a leg up. Canadian Prime Minister Justin Trudeau said on Thursday that the three nations are moving forward in a significant way. The Trump administration appears to be softening their hard ball tactics from earlier and with a deadline of May 1 to reach a deal, the wheels have been greased.

Canadian and Mexican officials will be in Washington, meeting with trade representatives with the possibility of an unofficial meeting over the weekend potentially bringing positive results.

Oil was higher despite the rise of the US dollar on Thursday. The easing of trade tensions despite the war of words between China and the US has benefited energy prices. Saudi Arabia announced a rise in prices, confident there is demand for crude at that level. The phantom of increasing US shale production remains hanging over the price of crude as the Organization of the Petroleum Exporting Countries' (OPEC) deal with Russia and other major producers is limiting output, giving those not part of the agreement the opportunity to increase production to capitalize on the higher prices.

Market events to watch this week:

Thursday, April 5
4:30am GBP Services PMI
8:30am CAD Trade Balance
Friday, April 6
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate

*All times EST