Derek Halpenny, European Head of GMR at MUFG, notes that the dollar weakened further yesterday ahead of the key data of the week, the February nonfarm payrolls data. Key Quotes “The consensus is for a pick-up in the pace of job gains from the weaker than expected 151k gain in January. Our NFP model has given us a startlingly weak estimate of under 100k. Looking through the variables to try and explain why our estimate is so far away from the consensus, it would appear the model places quite a lot of weight on the slide in the ISM non-manufacturing employment sub-index, which in yesterday’s report dropped from 52.1 in January to 49.7 in February. The February reading is well below the 6-month average of 55.1 and it is the first sub-50 print since February 2014. Payrolls growth in the 3mths to February 2014 did slow notably to just 133k but the slowdown was temporary and jobs growth rebounded strongly in March 2014. We also had severe weather problems back in Q1 2014 which helped explain the drop back then. There may be a similar type impact on this occasion as well, albeit the complete opposite in terms of the weather. Q4 was extremely mild and the US created 837k jobs, well above the sustainable pace and we may now be in the period of give-back. One sector prone to reporting weakness will be the construction sector. The data shows that sector creating 131k jobs in the three-month period to January – on an annualised basis that is way more than recent calendar year growth rates. The average annual pace of job gain in construction over the last four years was 247k. So there is certainly a strong case for some pullback in construction. Certainly if the NFP print is weaker than expected, like our own NFP model suggests, the dollar is likely to suffer further this afternoon, especially given the momentum is negative going into the data. But we doubt very much a weak report today would have much bearing on FOMC thinking at this stage. The unemployment rate in or around 5.0% is more or less at full employment and there is already compelling evidence that the current level of unemployment is starting to lift wage growth. Accelerating wage growth into an economy that is showing the core level of inflation moving higher leaves the FOMC with not much wiggle room for delaying for too long. Dallas Fed President Kaplan spoke yesterday and he certainly looks to be in the camp of delaying, urging caution by arguing “if in doubt, it’s better to wait”. That’s certainly the strong consensus, or possible unanimous view for the FOMC meeting on 16th March. Data today will have little bearing on whether the FOMC goes in June – that will be more about the March, April and May payrolls data that come before the 15th June FOMC meeting. We’d certainly expect to see evidence of pick-up by then especially if the current improvement in financial market conditions continues.” For more information, read our latest forex news.