- The US Dollar steadies going into the countdown to the US Jobs Report for August.
- Investors are cautious for the Nonfarm Payrolls report, which could trigger volatility around the US Dollar.
- The US Dollar Index retreats further, nearing the August low at 100.62.
The US Dollar (USD) trades slightly on the back foot on Friday as markets brace for potentially the most volatile event of the week, Nonfarm Payrolls (NFP). Markets are increasingly considering the possibility that the US Federal Reserve (Fed) could opt for a big interest-rate cut compared with the beginning of the week after a streak of labor-market-related data came weaker than expected. A big miss in the Nonfarm Payrolls number will confirm this stance, while a big beat on estimates might see a spicy outcome, with the US Dollar rallying and rate cut bets being quickly unwound.
The Nonfarm Payrolls print will be the main element together with the Unemployment Rate and the monthly Average Hourly Earnings. However, the surprise might come right at the end of the trading day with Federal Reserve Governor Christopher Waller due to speak after the Nonfarm Payrolls print is published. Fed Waller is known for delivering some market-moving comments, and he might be the one to confirm if in September the Fed will go for a 25-basis-point or a 50-basis-point rate cut.
Daily digest market movers: Here comes the payrolls
- At 12:30 GMT, the US Jobs Report for August will be released by the Bureau of Labor Statistics. Here are the main key takeaways to watch:
- Nonfarm Payrolls are expected to have increased by 160,000, accelerating from the tepid 114,000 seen a month earlier.
- Monthly Average Hourly Earnings should tick up to 0.3% from 0.2%.
- The Unemployment Rate should dip to 4.2% from 4.3%.
- Two Fed speakers are on the docket after the US Jobs Report is published:
- Federal Reserve Bank of New York President John Williams delivers keynote remarks and participates in a Q&A session at the C. Peter McColough Series on International Economics around 12:45 GMT.
- Around 15:00 GMT, Federal Reserve Governor Christopher Waller delivers a speech about the US economic outlook and participates in a Q&A session at the University of Notre Dame in Indiana.
- Equities are trading lower again, with Asia already closing off this week’s performance in red. Both European and US equities are also losing ground, although by less than 1%.
- The CME Fedwatch Tool shows a 59.0% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 41.0% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 29.9%, while there is a 49.9% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 20.2% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- The US 10-year benchmark rate trades at 3.70%, close to the lowest level for this year at 3.66%.
Economic Indicator
Nonfarm Payrolls
The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months’ reviews and the Unemployment Rate are as relevant as the headline figure. The market’s reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.
US Dollar Index Technical Analysis: How much more can you cut?
The US Dollar Index (DXY) is the sum of all parts that are taking place in the markets. Investors increasingly price in that the Fed will need to cut interest rates by more than what was anticipated a few weeks ago. Although a rate cut might be granted, the recent US economic data still puts the economy on a glide path for a soft landing, which means the Fed isn’t likely to cut aggressively as that would risk sparking inflation again.
Looking at key technical levels, the first resistance at 101.90 is starting to look very difficult to break through after it already triggered a rejection earlier this week. Further up, a steep 2% uprising would be needed to get the index to 103.18. Finally, a heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.
On the downside, 100.62 (the low from December 28) could soon see a test in case data supports more rate cuts from the Fed. Should it break, the low from July 14, 2023, at 99.58, will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.
