The United States (US) Bureau of Labor Statistics (BLS) releases the delayed Nonfarm Payrolls (NFP) data for September on Thursday at 13:30 GMT.
The US Dollar (USD) traders eagerly await the September employment report for clear hints on the health of the labor market and whether the US Federal Reserve (Fed) will lower interest rates next month.
What to expect from the next Nonfarm Payrolls report?
Economists expect Nonfarm Payrolls to rise by 50,000 in September after increasing by a meagre 22,000 in August. The Unemployment Rate (UE) is likely to stabilize at 4.3% during the same period.
Meanwhile, Average Hourly Earnings (AHE), a closely watched measure of wage inflation, are expected to rise by 3.7% year-over-year (YoY), at the same pace as seen in August.
Previewing the September employment report, TD Securities analysts said: “Job gains likely rebounded to 100K in September, supported by private NFP increasing 125K. Government jobs likely declined 25K.”
“We also look for the UE rate to go sideways at 4.3% as layoffs remain subdued. AHE likely moderated to 0.2% MoM (3.6% YoY),” they added.
How will the US September Nonfarm Payrolls affect EUR/USD?
The US Dollar has snapped its previous week’s pullback against its major currency rivals, staging an impressive turnaround against its major currency rivals as it gears up for the NFP showdown.
The renewed USD strength has pushed the EUR/USD pair back below the 1.1600 threshold. Will the downside continue?
A recent slew of prudent Fed commentaries and weak US private sector employment data have scaled back expectations of another 25 basis points (bps) interest rate cut by the central bank in December. Fed policymakers remain increasingly divided about how to balance inflation risks against a cooling labor market, prompting them to warrant caution on further monetary policy easing.
The Minutes of the October monetary policy meeting showed on Wednesday that “policymakers cautioned that lower borrowing costs could undermine the fight against inflation.”
Following the Minutes release, the odds for a December Fed rate cut declined to 33%, according to the CME Group’s FedWatch Tool, having seen around 50% before the event and at 65% a week ago.
On the economic data front, the Automatic Data Processing (ADP) Employment Change report, released on November 5, showed that US private payrolls increased by 42,000 jobs in October, exceeding expectations of a 25,000 gain.
Meanwhile, data published by the executive outplacement firm Challenger, Gray & Christmas on November 6 showed that corporations announced a 183.1% monthly surge in layoffs, marking the worst October in over two decades, per Reuters.
Additionally, the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) came in at 48.7 in October, coming in lower than the forecast of 49.5. Contrarily, the ISM Services PMI increased more than expected to 52.4 last month due to a solid jump in New Orders.
Amidst resurfacing US economic and labor market concerns, the September employment report, albeit stale, is eagerly awaited by markets to gauge the direction of the Fed’s interest rates in the coming months.
“Even as the September Nonfarm report will be somewhat dated, it may be the final full employment report the Fed has in hand ahead of its December monetary policy meeting,” economists at Wells Fargo said ahead of the release.
A reading below the 50,000 mark and an unexpected increase in the Unemployment Rate could affirm a slack in the US jobs market, reviving bets for a rate cut by the Fed in December. In such a case, the USD could come under intense selling pressure, lifting EUR/USD back toward 1.1700.
In contrast, if the NFP shows an outstanding job gain and the Unemployment Rate stays at 4.3% or even decreases, EUR/USD could extend the bearish momentum toward levels under 1.1400. Stellar jobs data would take bets of a December Fed rate cut off the table, providing additional legs to the USD upside.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:
“The main currency pair closed Wednesday below the 21-day Simple Moving Average (SMA) at 1.1574, reinforcing further declines. Meanwhile, the 14-day Relative Strength Index (RSI) holds well below the midline on the daily chart, adding credence to the bearish potential.”
“If the downside extends, the next support is seen at the November 5 low of 1.1469, below which the 200-day SMA at 1.1395 will be threatened. The line in the sand for buyers is located at the 1.1350 psychological level. On the flip side, any recovery will need acceptance above the 21-day SMA at 1.1574. The next relevant bullish target is seen at around 1.1650, where the 50-day and 100-day SMAs intersect. Additional upside could lead to the 1.1700 round level.”
Economic Indicator
Average Hourly Earnings (YoY)
The Average Hourly Earnings gauge, released by the US Bureau of Labor Statistics, is a significant indicator of labor cost inflation and of the tightness of labor markets. The Federal Reserve Board pays close attention to it when setting interest rates. A high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.
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Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
