📉EURUSD Tests 1.14 Ahead of NFP

The US labor market will be in focus today with the release of the key non-farm payrolls (NFP) data at 01:30 PM BST.

The NFP report is a crucial economic indicator for the US as it significantly influences the Federal Reserve's decisions on interest rates. One of the Fed's mandates is to maintain maximum employment. However, it is important to remember that the NFP report can be volatile and is based on surveys. As Fed Chair Jerome Powell recently stated, the unemployment rate—which is based on a separate household survey rather than a business survey—is a more important metric to watch.

Market Expectations

Economists and analysts surveyed by news agencies have a wide range of expectations for July's NFP data, with forecasts spanning from 0 to 170,000 new jobs and a median forecast of 104,000 to 110,000. This would represent a notable slowdown from the 147,000 jobs added in June and the lowest expectation in five months. Meanwhile, the ADP report, often seen as a precursor to the NFP, showed a rebound with 104,000 jobs added, reversing from its previous negative reading.

Key Forecasts

• NFP Employment: 104,000-110,000 (Previous: 147,000)

• Unemployment Rate: Increase to 4.2% from 4.1%

• Hourly Wages: 0.3% increase month-over-month (Previous: 0.2%)

• Annual Wage Growth: Around 3.8% (Previous: 3.7%)

However, Bloomberg Economics has a more optimistic forecast of 160,000 new jobs. Their model, they argue, accounts for a potential overestimation by the Bureau of Labor Statistics (BLS) of about 80,000 jobs per month due to company openings and closings. On the other hand, the data's positive tone could be undermined by a potential revision of previous figures. The abnormal increase of 40,000 jobs in the education sector in June is likely to be revised downwards. Furthermore, seasonal adjustments may work against today's reading, as July typically sees a large increase in temporary employment (e.g., agricultural and hospitality jobs). Ongoing government layoffs and the impact of deporting undocumented immigrants should also be considered.

The ADP report showed a clear rebound after several weak months. Source: Bloomberg Finance LP, XTB

The Labor Force Participation Rate as a Key Metric for the Fed

Jerome Powell has made it clear that the Fed will be paying more attention to the unemployment rate than the headline NFP figure. The decline in the labor force participation rate in May and June by a combined 755,000 people, while the population grew by 388,000, signals structural changes in the labor market. There are three possible scenarios for the unemployment rate:

• Base Scenario: Participation rate increases to 62.7% by year-end ⟹ Unemployment at 4.8%

• Stagnation Scenario: Participation rate remains unchanged ⟹ Unemployment at 4.3%

• Continued Decline Scenario: Participation rate falls ⟹ Unemployment could remain at 4.1%

The labor force participation rate has been on a downward trajectory in recent months. An increase in the number of people looking for work is a good sign for the economy, but as companies are less eager to hire, this could lead to a potential rebound in the unemployment rate. Source: Bloomberg Finance LP, XTB

Initial jobless claims have recently fallen significantly, suggesting the labor market remains strong, even as the number of people in the workforce shows a slight decline. Nevertheless, these claims may indicate that an actual rise in the unemployment rate is unlikely. If the Fed is now primarily guided by this indicator, it could suggest a lack of potential for a rate cut in September. Source: Bloomberg Finance LP, XTB

Implications for the Fed and the Market

The labor market is the second most important determinant for the Fed after inflation. If inflation remains elevated due to tariffs, the Fed will continue to monitor employment levels. If the labor market stays strong, the probability of a September rate cut could decrease further from its current level of just 40% (even with two votes for a cut at the last meeting, which was the first such lack of consensus since 1993).

Expectations for the Fed point to only one rate cut this year. Following the Fed's decision on Wednesday, expectations for a September move have significantly dropped. Source: Bloomberg Finance LP

How Might the Market React?

• A reading of 120,000-130,000 jobs or higher, with a stable or declining unemployment rate, could lead to further strengthening of the dollar. While these are positive signs for the economy, they would reduce the chances of rate cuts and could lead to deeper declines on Wall Street.

• A reading around consensus (100,000-110,000 NFP) with a rise in the unemployment rate to 4.2% as expected would most likely lead to stabilization in the dollar, possibly with a small increase in bond yields and a minor rally on Wall Street.

• A weak NFP reading below 70,000-80,000, with a stronger rise in the unemployment rate above 4.2%, would likely cause the dollar to weaken, bond yields to fall sharply, and Wall Street to rally.

• A recessionary scenario, which assumes no job growth or even a decline with a massive jump in the unemployment rate, is practically impossible but would lead to both a weaker dollar and weakness on Wall Street.

'EURUSD continues its downward trend, driven by trade agreements and a hawkish Fed. If today's NFP data is positive, EURUSD could continue to fall toward the key support level at 1.1250, which aligns with the Head and Shoulders pattern and the extent of the largest correction in this year's uptrend. However, if the NFP report is surprisingly negative, a return of EURUSD above the 23.6% retracement and a test of the 1.1500 level cannot be ruled out. Source: xStation5