US Nonfarm Payrolls set to grow modestly in August amid concerns over worsening labor market conditions
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- US Nonfarm Payrolls are forecast to rise 160K in August after gaining merely by 114K in July.
- The United States Bureau of Labor Statistics will release the critical jobs report on Friday at 12:30 GMT.
- The employment data could help gauge the size of the Fed interest-rate cut in September, rocking the US Dollar.
The United States Bureau of Labor Statistics (BLS) will publish August's highly anticipated Nonfarm Payrolls (NFP) data on Friday at 12:30 GMT.
The US labor market data hold the key for markets to gauge the size of the expected interest-rate cut by the US Federal Reserve (Fed) in September, ramping up the volatility around the US Dollar (USD).
What to expect in the next Nonfarm Payrolls report?
The Nonfarm Payrolls report is forecast to show that the US economy added 160,000 jobs in August, after creating 114,000 in July.
The Unemployment Rate is likely to dip to 4.2% in the same period from July’s 4.3% reading. Meanwhile, a closely-watched measure of wage inflation, Average Hourly Earnings, is seen increasing by 3.7% in the year through August after rising 3.6% in July.
The August employment data will offer significant insights into the strength of the US labor market, which are critical to shaping the Fed interest-rate outlook at the September 17-18 policy meeting and beyond.
Fed Chairman Jerome Powell indicated during his opening remarks at the Jackson Hole Symposium last month that an "unwelcome further cooling in the labor market" could warrant more aggressive policy action, fanning a 50 basis point (bps) interest rate cut.
Meanwhile, the Fed tweaked its July policy statement to mention that it is "attentive to the risks to both sides of its dual mandate", rather than previously only noting its attention to inflation risks.
Previewing the August employment situation report, TD Securities analysts said: “We expect US payrolls to rebound just north of the 200k mark in August following July's downside surprise. The UE rate likely retraced a tenth to 4.2% with wages rising a firmer 0.3% MoM.”
How will US August Nonfarm Payrolls affect EUR/USD?
The US Dollar (USD) has resumed its downward momentum against its major rivals, sending the EUR/USD pair back toward the 1.1100 threshold. Will the US NFP report double down on the dovish Fed expectations, perking up EUR/USD at the expense of the USD?
In the lead-up to the US NFP showdown, weak Institute for Supply Management (ISM) Purchasing Managers Index (PMI) data raised concerns over a potential ‘hard landing’ for the US economy amid fresh signs of loosening labor market conditions.
The ISM announced on Tuesday that its headline US Manufacturing Index improved slightly to 47.2 in August from July’s 46.8 but remained in contraction while below the estimated 47.5 print. Data on Wednesday showed that US Job Openings dropped to a 3-1/2-year low in July, arriving at 7.67 million, following the 7.91 million openings in June while below the expected 8.1 million. The Automatic Data Processing (ADP) reported on Thursday that the US private sector employment increased by 99,000 jobs in August after rising by a downwardly revised 111,000 in July.
Discouraging US economic data ramped up bets for a 50 bps interest-rate cut by the Fed at its September meeting. Markets are now pricing in a 47% chance of an outsized 50 bps rate cut by the Fed later this month, up from 31% at the start of this week, according to the CME Group’s FedWatch tool.
If the headline NFP figure surprises with payroll growth below 100,000, it could bolster the odds of a big cut in September, exacerbating the US Dollar’s pain while pushing EUR/USD further north. Conversely, a strong NFP print combined with hot wage inflation data would pour cold water on aggressive Fed rate cut prospects for this month, boosting hopes that the Fed may opt for a more modest 25 bps rate reduction. This could fuel a decent US Dollar comeback, reinforcing fresh EUR/USD selling back toward 1.0900.
Dhwani Mehta, Analyst at FXStreet, offers a brief technical outlook for EUR/USD:
“The EUR/USD pair defends the 21-day Simple Moving Average (SMA) at 1.1061, having recaptured it on Wednesday. The 14-day Relative Strength Index (RSI) points north well above the 50 level, currently near 58, suggesting that buyers are likely to remain in charge in the near future.”
“Buyers need to crack the year-to-date high of 1.1202 recorded last month to take on the 1.1250 psychological barrier. Further up, the July 18, 2023, high of 1.1276 will challenge the bearish commitments. Alternatively, acceptance below the 21-day SMA at 1.1061 is critical for a sustained correction. The next healthy support levels are seen at the 1.1000 round figure and the 50-day SMA at 1.0939,” Dhwani adds.
Economic Indicator
Unemployment Rate
The Unemployment Rate, released by the US Bureau of Labor Statistics (BLS), is the percentage of the total civilian labor force that is not in paid employment but is actively seeking employment. The rate is usually higher in recessionary economies compared to economies that are growing. Generally, a decrease in the Unemployment Rate is seen as bullish for the US Dollar (USD), while an increase is seen as bearish. That said, the number by itself usually can't determine the direction of the next market move, as this will also depend on the headline Nonfarm Payroll reading, and the other data in the BLS report.
Read more.Employment FAQs
Labor market conditions are a key element in assessing the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels because low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given their significance as a gauge of the health of the economy and their direct relationship to inflation.
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