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US ADP jobs surge shifts focus to non-farm payrolls

European markets look set for a strong open this morning having started on the front foot yesterday, helped by a continuation of the recent theme of an improving economic environment, as further positive data fuelled a positive start to the month.

This rise in US markets saw yet more record closes across the board, after a singularly upbeat ADP payrolls report showed that the US economy added 253k jobs in May, well above expectations of 177k. This bumper number more or less confirmed the prospect of a June rate rise, with the potential for further moves later in the year, maybe in September, if the economy holds up. Yesterday’s number also raises the bar for today’s official non-farm payrolls report, which is expected to come in at around the 180k level, down from 211k in April.

This seems rather conservative given the decent ADP number, and the fairly close correlation between the two we’ve seen over the last few months, the March outlier notwithstanding. This would suggest that a number in excess of 200k for non-farms would be more in line with expectations.

While these figures point to a US economy ticking along quite nicely, they also point to an economy that appears to still have a significant degree of slack, particularly since wage growth continues to remain on the low side.

The ISM manufacturing report yesterday was also notable for a slowdown in prices paid, reinforcing a perception of weak inflation, something that Fed governor Lael Brainard expressed some concern about earlier this week. This is particularly pertinent given recent weakness in various commodity prices, including oil, which has been unable to rally despite two big weekly draws this week. In this context today's average hourly earnings data for May is likely to be closely scrutinised, with a modest increase from 2.5% to 2.6% expected.

Before today’s payrolls report the focus returns to the UK and the pound, which has had a rather turbulent week on the back of a tightening of the polls in favour of the Labour Party ahead of next week’s general election.

The pound appears to be holding up fairly well in the face of this with evidence that the UK economy is doing better in Q2 than it was in Q1. Another strong manufacturing report yesterday, is set to be followed by the latest construction PMI report for May.

In the April numbers we saw a decent upswing, helped by an upturn in civil engineering and housebuilding, with new jobs growing at the fastest pace since May last year. If this trend can continue into this morning then we can expect to see a number in line with April’s 53.1, with consensus coming in around 52.7.

FX snapshot

EUR/USD continues to find it tricky below the 1.1270 level, as well as the November highs at 1.1300. While below here the risk is we drift back to the lows this week, just above 1.1100 and possibly even down as far as the 1.1020 area.

GBP/USD appears to have found a bit of a floor for now just above the 50 day MA and the 1.2750 level and while we do so the uptrend should remain intact and as such a retest of the 1.3040 area remains a possibility. A consolidated move through 1.3050 has the potential to target the 1.3320 area. Only a move below 1.2750 argues potentially back towards the 1.2600 area.

EUR/GBP had another failure at the 0.8750 area has seen the euro slip back again, finding support at the 0.8680 area. A break of this level has the potential to prompt a drift back down to the 200 day MA at 0.8600. While above the 0.8680 level the risk remains for a move towards the March highs at 0.8790.

USD/JPY has managed to find some support above the 110.20 area which suggests the prospect of a move back through the 111.60 area towards the 112.40 area.

Heightened market volatility is likely over the election period, which could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.

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