⏫EURUSD gains 0.5% ahead of NFP

Key data from the US labor market will be released at 02:30 pm CET

• Bloomberg consensus points to an NFP reading of 160k.
• ADP report showed private employment growth of only 77k.
• Bloomberg Economics indicates in a report that today's NFP reading may be as low as 65k, which would be a market disappointment.

Will labor market data disappoint investors?

The US labor market has been strong for months, underpinning the strengthening of the US dollar and the recent maintenance of unchanged interest rates. On the other hand, there have been many signs of weakening labor market conditions recently:

• ADP report with a reading of 77k in private employment
• Elevated jobless claims readings
• High planned layoffs according to the Challenger report
• Withdrawal of fiscal support for the education sector and the new Trump administration's policy (the expiration of aid funds from the Biden presidency, such as the Elementary and Secondary School Emergency Relief Fund (ESSER III) and the State and Local Fiscal Recovery Funds (SLFRF), created a so-called fiscal cliff for state and local governments). According to BE, this could have reduced government employment by 28k and private sector employment by 18k.
• Poor weather in the first two months of the year: severe winter and storms led to a reduction in employment in the United States. According to BE, the weather had a net negative impact on employment of 60k compared to a standard month.
• It is also worth mentioning the start of significant layoffs in the government sector due to the work of DOGE - the Department of Government Efficiency managed by Elon Musk. It is estimated that up to half a million civil servants may lose their jobs by the end of 2025.

ADP report and jobless claims in recent weeks indicate a stronger cooling in the labor market. Source: Macrobond, XTB

Jobless claims have been elevated recently, although a rise above 300k would be an alarming signal. Macrobond, XTB

Will the Fed watch the data?

The December and January Fed meetings clearly showed that US interest rates will remain unchanged for an extended period, due to the elevated risk of inflation rebounding. However, the Fed also acknowledged that cuts could come quickly if there is a significant weakening of the labor market. If the data weakens from moderate economic weakness itself, and the new administration plans large layoffs, and the tariff situation may also lead to a deterioration in the economy, the Fed may be forced to cut rates sooner. Therefore, today's weak data may rekindle expectations for faster cuts than in the beginning of the second half of this year. Nevertheless, for the Fed to cut interest rates in March, today's data would most likely have to show a drop in employment, and next week's CPI inflation would have to see a huge drop.

Expectations for lower US interest rates are rising, which is also leading to the weakening of the dollar itself. Source: Bloomberg Finance LP, XTB

How will the market react?

EURUSD has seen nearly a 5% increase this week. The pair is crossing the 61.8 retracement of the last downward impulse, which could indicate a potential trend reversal on the pair. The bond yield spread suggests a possible return to last year's highs around the 1.1200 level. On the other hand, the euro is exposed to potential US tariffs on goods from the European Union, and strong data and no change in the Fed's stance could reverse recent gains on the pair. Currently, the nearest resistance zone is around the 78.6 retracement at the 1.10 level, while support is at the 1.0800 level, and then at 1.0700 at the 50.0 retracement.