ADP Jobs Preview: Will a softer report slow down the US Dollar?

• After surging last month by nearly 500K, private job creation is expected to slow down significantly.
• Market consensus is for an increase in private payroll of 188,000 jobs.
• The last ADP report triggered market reactions; will it repeat again?

On Wednesday, at 12:15 GMT, Automatic Data Processing (ADP) will release its employment report for July. Market consensus is for an increase in private payroll of 188,000; such a reading would be the slowest growth in four months and would follow the surprise of June that showed a super strong increase of 497,000, the most since February 2022, well above the consensus forecast of 228,000.

The positive surprise from the June ADP report triggered expectations of a surprise from the Nonfarm Payrolls (NFP); however, payrolls for that month came in at 209,000 – below the market consensus of 225,000. It was the lowest reading since December 2020, and for the first time in 15 months, it came below market consensus. The miss was moderate, and it can be partially attributed to the strong ADP report.

The strong labor market data added to other upbeat reports of the US economy, which led to another rate hike from the Federal Reserve last week. The evidence contradicted forecasts that the US economy was headed toward a recession.

The ADP report will be another one in a series of labor market indicators due this week. The June JOLTS Job Openings on Tuesday, the ADP on Wednesday, the weekly Jobless Claims and the Q2 Unit Labor Costs on Thursday, and NFP on Friday. Payrolls are expected to rise by 200,000 in July and the unemployment rate to stand at 3.6%. The combination of data points to a still-hot and tight labor market, which would allow the Fed to keep raising interest rates if it considers it necessary. On the contrary, signs of a sharp slowdown would make the central bank think twice before hiking again.

Good for the economy, good for the Dollar 

Last week, after the FOMC meeting, US economic data showed a resilient economy that has weathered the Fed's monetary policy tightening well, which triggered a rally in the US Dollar that is still going on. What turned out to be good news for the economy became good news for Wall Street and for the US Dollar. The Greenback has risen during the last few days, even despite risk appetite and higher equity prices.

The current context could suggest that a strong jobs report could add fuel to the current Dollar rally. However, the impact of the ADP report could be limited. Last month's surprise positive numbers were not supported by NFP, so the markets might not put too much emphasis on the ADP report. Revisions to the almost 500K increase in June will also be scrutinized. 

On the contrary, a weaker report could be welcome news for the Fed but not positive for the Dollar. Policymakers expect a slowdown in the job market, and signs in that direction should lead to lower US yields and a weaker US Dollar, making it harder for the Greenback to continue its rally. 

DXY having its best weeks since May 

The US Dollar Index arrives at the meeting enjoying its strongest two weeks since May and recovering from one-year lows. The DXY has risen back above 100.00 and is testing the 20-week Simple Moving Average (SMA) which stands around 102.50. Around that level, the 55- and 100-day SMAs are also spotted. A break higher would improve the outlook for the Dollar, suggesting that the recovery is sustainable.

However, if the DXY fails to break and to remain above 102.50, it would weaken the recovery mode. A drop below 102.00 could trigger more losses, exposing the crucial support area of 101.00. If that level fails to hold, a resumption of the downtrend and a test of the 2023 low at 99.55 seems likely.