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What To Expect From NFP Tomorrow

July 6, 2023
Frank Cabibi

Today's Automatic Data Processing NFP was released at a shockingly higher number than expected. As a result, the dollar spiked on a July rate hike. As we are now twenty days out from the next Fed decision, the fate of the USD, SPX500, and gold will all rely on what happens to NFP tomorrow.

EdgeFinder Analysis

GBPJPY is nearly a strong buy on the EdgeFinder at +4. Although seasonality and trend projections contradict each other, at the least retail and COT are clear on their bias. Smart money continues to buy the pound while disposing of the yen.

These currencies are of two very different monetary policies. Japan's Ueda does not want to think about inflation until the economy sees substantial growth. Meanwhile, England's Bailey is solely focused on maintaining the stubborn inflation rates crippling the economy.

Gold struggles for the time being due to strong economic data and a bet on another rate hike in July. Both good economic data and tighter monetary policy are two factors that will affect gold in a negative way. This may hold pressure on the metal until sentiment changes.

One thing to look at, however, is the strong level of demand in the $1880s. Price needs to hold up here or it will be even more of a bearish confirmation. Friday's COT report will also be useful in figuring out sentiment around the metal.

Here is UJ on the historical backtest feature. With help from the 10 and 2 year bond yields, price was able to keep the uptrend. As we await NFP news tomorrow, we should consider which plays will most likely happen in the markets. Right now, the market is heavily betting on a dollar strength increase. At the same time, pairing USD against the weakest asset in the market might be the best bet for the short term.

USDJPY has a lot of upside potential. Japan's inflation rate is rapidly catching up with the US's, as we may see a convergence in the rates soon. As US inflation declines, the yen rate does the opposite. This pair is likely to stay in the buy range on the EdgeFinder until we see a shift in BOJ sentiment.

Retail Spotlight

While strong Aussie and Euro, they are also short pound and Swiss. Retail is all over the place right now, while only a few pairs are mixed. There are some strong biases going in either direction. Some might be celebrating as retail dollar sentiment matches its direction today.

Smart Money Spotlight

According to COT, the assets making the biggest change in positioning are gold, CAD, SPX and GBP. These assets saw an increase in either longs or shorts and a decrease in another. Week to week change shows a more bearish gold while a more bullish CAD, GBP and SPX.

Fundamental Spotlight

Economists expect at least one more hike from the Fed, taking the new short term rate to just above 5.4%. The market is taking this as hawkish sentiment from the Fed, even though it appears that the hike path is near an end. Good NFP numbers will help reinforce the potential 25 bp decision this month as well as the forecasts shown on the chart above.

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