📣EURUSD below 1.18 Ahead of NFP

At 1:30 PM BST, key US labor market data will be released, just before the Independence Day holiday on Friday.

Unusually, US labor market data will be released today, Thursday, due to tomorrow's Independence Day celebrations in the US. Several other US data points are also expected today, and the US trading session will conclude slightly earlier. Following yesterday's negative surprise from the ADP data, investors may question whether a negative NFP reading could pave the way for a rate cut at the July meeting.

Market Expectations

The market consensus anticipates an increase of 110,000 jobs in June, a decrease from 139,000 in May. The unemployment rate is projected to rise to 4.3% from 4.2%, which would mark its highest level since October 2021. Bloomberg Economics forecasts a slightly higher increase of 120,000 but cautions that the data may be inflated by various adjustments, averaging 80,000 jobs per month. There is also a perceived risk of the unemployment rate climbing to 4.4%.

Forecasts:

• NFP: 110-120k (consensus vs. Bloomberg Economics)

• Unemployment Rate: 4.3% (vs. 4.2% previously)

• Average Hourly Earnings: +0.3% m/m (vs. +0.4% previously)

• Annual Wages: 3.9% y/y (vs. 3.9% y/y previously)

If the NFIB index proves to be a leading indicator, the NFP employment change should eventually reflect a weaker reading. Source: Bloomerg Finance LP, XTB

The manufacturing ISM employment sub-index recently fell to an extremely low level of 45 points, suggesting a prospect of layoffs in the sector. Source: Bloomerg Finance LP, XTB

Labor Market Warning Signs

A series of indicators point to a weakening labor market. ADP data revealed a decline of 33,000 private sector jobs—the first negative reading since March 2023. Weekly unemployment claims are also rising, and ISM labor market sub-indices have been consistently weak, particularly from the manufacturing sector. Data from Bloomberg Economics suggest that actual employment growth might be as low as 40,000 jobs, once adjustments from the Bureau of Labor Statistics' "birth-death" model are excluded. However, the latest JOLTS reading was stronger than expected, at over 7.7 million compared to the previous nearly 7.4 million, though this could be a seasonal rebound.

Recent data shows job vacancies have begun to rebound, indicating that the labor market is no longer cooling further. Source: Bloomerg Finance LP, XTB

The negative ADP reading is a strong warning signal, though it is worth noting that the NFP report has, in most recent cases, outperformed ADP. Source: Bloomerg Finance LP, XTB

Fed Stance and July Cut Probability

Jerome Powell did not rule out a July rate cut in his recent statements, asserting "I can't say," but emphasizing that the decision will hinge on economic data. Markets currently price in approximately a 25% probability of a cut at the Federal Reserve's late July meeting. Two Fed members—Christopher Waller and Michelle Bowman—have openly supported the possibility of a July cut, provided inflationary pressures remain contained. Interestingly, they are also viewed by the market as potential candidates for Fed Chair after Powell's departure next May.

The probability of a July cut has notably increased to 25%, compared to around 15% in mid-June. Source: Bloomerg Finance LP, XTB

What Needs to Happen for a Cut?

Pressure on Jerome Powell from Trump is mounting almost daily. According to Trump, US interest rates should currently be around 1.0%. The central bank, however, remains independent. Yet, if data continues to deteriorate and the Fed refrains from a cut, the scenario of an earlier announcement of Powell's successor becomes highly probable. Key to a July cut would be very weak data. If the ADP report is confirmed by the NFP report showing an actual decline in employment, it would provide a strong foundation for a cut at the end of this month. Another crucial factor would be an increase in the unemployment rate to 4.4%. The Fed itself recently revised its projection, indicating that the unemployment rate will reach 4.5% this year.

Unemployment claims remain elevated, but only a rise above 300,000 would constitute a strong warning signal. Source: Bloomerg Finance LP, XTB

What About EURUSD?

The EUR/USD pair has seen significant appreciation in recent months, accelerating its gains at the end of June. It is currently testing its highest levels since 2021. In terms of magnitude, the current upward trend is beginning to resemble the move observed in 2020. However, while the 2020 surge was largely driven by demand for the euro, current gains are primarily linked to dollar weakness. Should today's data genuinely indicate concerns about the state of the US economy, the potential for further upside continuation would be considerable. Currently, the European Central Bank is understood to have a tolerance threshold for EUR/USD around 1.20, as a stronger euro could lead to deflation. Nevertheless, if today's data prove robust, with a reading between 110,000 and 150,000, the chances of a rate cut will diminish, and the pair may experience a significant correction.