Nonfarm payrolls to rise by 175,000 in July after strong performance in June

U.S. nonfarm payroll employment is forecast to rise by 175,000 in July after increasing by 206,000 in June.
The Bureau of Labor Statistics will release its key US employment report on Friday at 12:30 GMT.
Employment data could deepen the U.S. dollar’s woes after the Federal Reserve’s dovish stance on Wednesday.

Attention now turns to the key nonfarm payrolls (NFP) data for July, due out at 12:30 GMT on Friday, as markets continue to assess this week’s decision by the US Federal Reserve (Fed).

US labor market data is set to be released by the Bureau of Labor Statistics (BLS), which could suggest another Fed rate cut before the end of the year, as a September start is already in the cards. The US dollar (USD) is poised for increased volatility following the release of the data.

What can we expect from the next nonfarm payroll report?

The nonfarm payroll report is expected to show the U.S. economy added 175,000 jobs in July, following a bigger-than-expected gain of 206,000 in June.

The unemployment rate is likely to remain unchanged at 4.1% over the same period. Meanwhile, a closely watched measure of wage inflation, average hourly earnings, is expected to rise 3.7% in the year to July after posting a 3.9% increase in June.

This time, the U.S. jobs report carries more weight, especially after the Federal Reserve changed its July policy statement to say it was “aware of risks to both sides of its dual mandate,” instead of previously focusing solely on inflation risks.

The Federal Reserve on Wednesday kept the federal funds rate at 5.25%-5.5%, acknowledging “some further progress” toward its 2% inflation target.

During a news conference, Federal Reserve Chairman Jerome Powell said the committee’s “overall feeling is that the economy is approaching a point where it would be appropriate to lower our interest rate,” confirming the September rate cut.

On employment, Powell said indicators show the labor market is gradually normalizing from “overheated” conditions. While he tried to be rather cautious in his message, his approach to inflation and employment only made markets believe another rate cut could be on the table this year after September.

Meanwhile, the U.S. private sector posted a 122,000-employment gain in July after a 155,000-employment gain in June, the ADP National Employment Report released Wednesday showed. The data missed market expectations of a 150,000-employment gain for the reporting period. The BLS also reported Tuesday in its Job Openings and Labor Turnover Survey (JOLTS) that the number of job openings on the last business day of June was 8.184 million, down from an expected 8.03 million.

Previewing the July employment report, TD Securities analysts said: “We expect July wages to move largely sideways compared with June, printing 200k early in the third quarter. High-frequency data suggests that employment growth is still holding up. Separately, the EU rate is likely to be unchanged at 4.1%, but there is a risk it could fall back to 4.0% after recent gains.”

“We also expect wage growth to slow by one tenth to 0.2% m/m and to 3.6% y/y,” analysts added.

How will the US nonfarm payroll data for July affect the EUR/USD exchange rate?

The Fed’s dovish stance fueled a US dollar (USD) correction across the board, while benchmark 10-year US Treasury yields attacked the key 4.0% level, lifting the EUR/USD pair back towards the 1.0800 mark. Will the pair sustain a rebound after the key US NFP release?

A surprise in the form of NFP and wage inflation would further cool the prospects for rate cuts this year, allowing the US dollar to catch its breath. This in turn could fuel a fresh sell-off in EUR/USD towards 1.0700. However, if US employment data confirms easing labour market conditions and a disinflationary trend in wage inflation, the dollar could accelerate its corrective decline on renewed dovish Fed bets. In that case, EUR/USD could extend a rebound towards 1.0900.

Dhwani Mehta, an analyst at FXStreet, provides a brief technical forecast for the EUR/USD pair:

“EUR/USD has encountered strong resistance at the 21-day simple moving average (SMA), squared off at 1.0856, and has returned to negative territory. The 14-day relative strength index (RSI) has headed south below the 50 level, currently near 42, suggesting that sellers may retain control in the near term.”

“A strong hold below the July low of 1.0713 is key to trigger further downside towards the psychological barrier of 1.0650. On the other hand, buyers need to find acceptance above the 21-day SMA of 1.0856 for an extended bounce towards the round-robin level of 1.0900. Further down, the July high of 1.0948 could be challenged,” Dhwani added.

Economic indicator

Non-farm wages

The Nonfarm Payrolls report shows the number of new jobs created in the U.S. during the previous month across all nonfarm payroll businesses; it is published by the U.S. Bureau of Labor Statistics (BLS). Monthly changes in payrolls can be extremely volatile. This number is also subject to strong revisions, which can also cause volatility on the Forex board. Generally speaking, a high reading is seen as bullish for the U.S. dollar (USD), while a low reading is seen as bearish, although revisions from previous months and the unemployment rate are just as important as the headline number. The market’s reaction therefore depends on how the market evaluates the entire data contained in the BLS report as a whole.

Frequently Asked Questions about Non-Farm Wages

Nonfarm Payrolls (NFP) is a component of the monthly employment report of the U.S. Bureau of Labor Statistics. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the U.S. during the previous month, excluding the agricultural sector.

Nonfarm payroll data can influence Federal Reserve decisions because it provides a measure of how well the Fed is fulfilling its mandate to support full employment and 2% inflation. A relatively high NFP score means that more people are employed, earning more money, and therefore likely spending more. A relatively low Nonfarm Payrolls score, on the other hand, can mean that people are having a hard time finding work. The Fed typically raises interest rates to combat high inflation caused by low unemployment and lowers them to stimulate a stagnant labor market.

Nonfarm Payrolls tend to have a positive correlation with the US dollar. This means that when payroll data is higher than expected, the US dollar tends to rise and vice versa when it is lower. NFP affects the US dollar due to its impact on inflation, monetary policy expectations, and interest rates. A higher NFP usually means that the Federal Reserve will be more restrictive in its monetary policy, supporting the US dollar.

Nonfarm payrolls are generally negatively correlated with the price of gold. This means that higher than expected payroll data will have a depressing effect on the price of gold 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 appreciates, it takes fewer dollars to buy an ounce of gold. In addition, higher interest rates (which usually help higher NFP) also make gold less attractive as an investment compared to staying in cash, where the money will at least earn interest.

Nonfarm Payrolls is just one component of a larger employment report and can be overshadowed by other components. Sometimes, when NFP is higher than expected but average weekly earnings are lower than expected, the market ignores the potentially inflationary impact of the main result and interprets the decline in earnings as deflationary. The participation rate and average weekly hours components can also affect the market reaction, but only in rare cases, such as the “Great Resignation” or the global financial crisis.