The United States (US) Bureau of Labor Statistics (BLS) will release the critical Nonfarm Payrolls (NFP) data for August on Friday at 12:30 GMT.
The US Dollar (USD) remains at the mercy of the August employment report, which will be key to determining the size of the US Federal Reserve’s (Fed) interest rate cut due later this month.
What to expect from the next Nonfarm Payrolls report?
Economists expect Nonfarm Payrolls to increase by 75,000 in August after reporting a meagre 73,000 gain in July. The Unemployment Rate (UE) is likely to climb to 4.3% during the same period, following July’s 4.2% print.
Meanwhile, Average Hourly Earnings (AHE), a closely watched measure of wage inflation, are expected to rise by 3.7% year-over-year (YoY) in August, following a 3.9% growth in July.
Previewing the August employment report, TD Securities analysts said: “We expect job gains moderated to 25K in August, in line with a recent slowdown in hiring momentum. The manufacturing, professional and business services, and federal government sectors are likely to weigh down NFP. “
“We also look for the UE rate to stay at 4.2%, reversing some volatile factors in the July report. AHE growth is likely to go sideways at 0.3% MoM and down to 3.8% YoY,” they added.
How will the US August Nonfarm Payrolls affect EUR/USD?
The US Dollar stages a solid recovery from five-week lows against its major currency rivals in the lead-up to the NFP showdown, dragging the EUR/USD pair back to the weekly low.
While a 25-basis points (bps) September rate cut is almost a done deal, with the CME Group’s FedWatch tool showing a 90% chance of such a move, speculations are also growing over a jumbo cut this month.
Fed Chairman Jerome Powell, in his Jackson Hole speech last month, voiced concerns over the US labor market.
“Downside risks to employment are rising, while GDP growth has slowed notably, reflecting a slowdown in consumer spending,” Powell told an audience of international economists and policymakers at the Jackson Hole Symposium.
Powell further noted that “if those risks materialize, they can do so quickly,” as the Fed may need to cut rates.
On the data front, the US ISM reported on Tuesday that its Manufacturing PMI edged up to 48.7 in August from 48.0 in July, but fell short of market expectations of 49.
Meanwhile, the JOLTS report on Wednesday showed that US Job Openings, a measure of labor demand, fell to a ten-month low of 7.181 million on the last day of July, way below expectations of 7.4 million for the reported period.
The Automatic Data Processing (ADP) report showed on Thursday that US private sector payrolls increased less than the estimated 95,000 print in August, rising by 54,000 jobs after a slightly upwardly revised 106,000 increase in July.
Against this backdrop of data disappointment, the August jobs report holds utmost significance as markets seek clarity on the size of the upcoming Fed rate cut call.
A reading below the 50,000 level and an expected increase in the Unemployment Rate could point to further slowdown in the country’s hiring momentum, adding to the calls for a 50 bps rate reduction this month.
In such a case, the USD could come under intense selling pressure, providing extra legs to the record rally in Gold.
In contrast, if the NFP prints above 100,000 and the Unemployment Rate stays at 4.2%, Gold could witness a sharp pullback as the data would push back against expectations of an aggressive rate reduction.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:
“The main currency pair is keeping its range around the 1.1665 confluence zone of the 21-day Simple Moving Average (SMA) and the 50-day SMA ahead of the NFP release, while the 14-day Relative Strength Index (RSI) holds above the midline on the daily chart.”
“Buyers need acceptance above the 1.1700 barrier to extend the uptrend toward the August high of 1.1743. The next bullish target is seen at the July 24 high of 1.1789. On the other hand, strong support could align at the 1.1600 figure, below which the 100-day SMA at 1.1521 will be challenged. Additional declines could lead to the 1.1450 psychological level.”
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.
