Dollar Gains Restrained After Enthusiastic ADP Employment Report

Market Trends - 01/11/2017

Figures reported earlier by ADP showed that job creation experienced its best month since March’s 255,000 gain after private payrolls rose by 235,000 during October.  The data, which comes ahead of the Federal Reserve's decision due later in the session, highlights the robustness of the US labor market after Hurricanes Harvey and Irma resulted in significant disruptions.  Already, rebuilding efforts are well underway, contributing to a significant upturn in construction jobs as disaster-hit regions restore damaged infrastructure and housing.

Key behind the gains was momentum in the services sector which contributed 150,000 positions while construction and manufacturing added 62,000 and 22,000 respectively.  With current estimates forecasting a nonfarm payroll reading of 312,000, the strong showing from ADP figures will likely contribute to expectations of a strong employment number on Friday.  The optimistic data has contributed to dollar strength, but failed to move the currency significantly as market participants prepare for the impending FOMC announcement.

Since September, the US dollar has been a relatively strong performer relative to other major peers such as the Franc, New Zealand Dollar, Australian Dollar and Euro as expectations of continued policy tightening help catalyze ongoing appreciation.  Even though no rate hike is expected to be announced during the FOMC decision later in the session, there is the possibility that the outlook will be adjusted to reflect more sluggish inflation increases.

At present, markets are firmly in the camp that the Federal Reserve will raise rates again in December.  As such, the downside risks for the dollar are much more significant considering any disappointing language in the statement or revised comments to reflect inflationary trends could sink the recent greenback strength.  While USDJPY is trading just shy of the highest point since Friday and approaching a multi-month peak, market participants are unlikely to increase their amount of exposure to the dollar until after the Fed despite the encouraging labour backdrop.

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