October NFP data is crucial for November Fed rate decision

US Nonfarm Payrolls are expected to rise by 113K in October after September’s stellar gain of 254K.
The United States Bureau of Labor Statistics will release the labor data on Friday at 12:30 GMT.
The US Dollar’s fate and the Fed’s future interest rate cuts hinge on the US jobs data.

All eyes are on the market-moving Nonfarm Payrolls (NFP) data for October, to be released by the United States Bureau of Labor Statistics (BLS) on Friday at 12:30 GMT.

US labor market data is critical to determining the Federal Reserve’s (Fed) future interest-rate cuts and has a significant influence on the value of the US Dollar (USD) against its major rivals.

What to expect in the next Nonfarm Payrolls report?

Economists expect the Nonfarm Payrolls to show that the US economy added a meager 113,000 jobs in October, following a strong gain of 254K in September.

The Unemployment Rate (UE) is likely to remain steady at 4.1% in the same period.

Meanwhile, Average Hourly Earnings (AHE), a closely-watched measure of wage inflation, are expected to increase by 4.0% in the year through October, at the same pace seen in September.

The October jobs report is eagerly awaited for fresh hints on the Fed’s interest rate path, especially as industry experts and analysts speculate that the Fed could pause its easing cycle next month on a blockbuster Nonfarm Payrolls print.

However, downside risks to the jobs data persist, as it is likely to be distorted by the two recent hurricanes and the strike at Boeing.

Previewing the October employment situation report, TD Securities analysts said: “The November NFP report is set to be extremely noisy, but we expect a below-consensus 70k gain. High-frequency labor market data already shows some softening, and Hurricanes and the Boeing strike may subtract a further 80k from the reading.”

“We expect the UE Rate to rebound to 4.3% from 4.1% as the decline was likely overstated, but for AHE to rise 0.4% MoM amid distortions,” they added.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess 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 thus 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 and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

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.

How much do central banks care about employment?

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 its significance as a gauge of the health of the economy and their direct relationship to inflation.

How will US October Nonfarm Payrolls affect EUR/USD?

Before the Fed entered its ‘blackout period’, several policymakers supported further interest rate cuts while warranting caution on the inflation outlook, echoing the US central bank’s data-dependent approach.

At the time of writing, markets are fully pricing in a 25 basis points (bps) Fed rate cut in November, with about a 70% probability of another quarter percentage point reduction in December, according to CME Group's FedWatch tool.

The USD has been capitalizing on US economic resilience and odds of a less aggressive Fed’s easing cycle leading into the NFP showdown on Friday.

Earlier in the week, the BLS reported that the JOLTS Job Openings declined to 7.44 million in September from 7.86 million in August. This reading came in below the market expectation of 7.99 million but failed to alter the market’s pricing for November’s rate cut move.

The Automatic Data Processing (ADP) announced on Wednesday that employment in the US private sector increased by 233,000 jobs for October, accelerating from the upwardly revised 159,000 in September and better than the market estimate of 115,000. Even though these figures aren’t always correlated with the official NFP numbers, the strong ADP jobs report eased concerns about the health of the US labor market, leaving room for an upside surprise in Friday’s payrolls data.

If the headline NFP reading surprises with a payroll growth below 100,000, it could trigger a fresh knee-jerk US Dollar selling wave. However, the Greenback is expected to resume its recent uptrend against its major rivals as the dust settles and markets digest the noisy data due to hurricanes and strikes. In such a scenario, EUR/USD traders will brace for a whipsaw within a familiar range.

Conversely, a stronger-than-expected NFP print and elevated wage inflation data would seal in a rate reduction by the Fed next week, providing extra legs to the USD uptrend while dragging EUR/USD back toward 1.0700.

In conclusion, the reaction to the US labor data may be short-lived, with the Greenback expected to continue its advance.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD:
“Once EUR/USD stabilizes above 1.0870, where the 200-day Simple Moving Average (SMA) is located, and starts using this level as support, it could gather bullish momentum. On the upside, 1.0940 (100-day SMA) could be seen as the next hurdle before 1.1000-1.1010 (round level, 50-day SMA).”

“On the flip side, technical sellers could emerge if EUR/USD fails to clear the 1.0870 hurdle. In this scenario, 1.0800 (round level) could be seen as interim support before 1.0670 (static level from June).”

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.