Non-farm payrolls preview: will NFP help enhance dollar rally?

With markets expecting a Fed rate cut, how will traders view the upcoming US jobs report in relation to price action?

What to watch out for in the NFP report

Friday brings yet another volatility inducing event for traders to content with, as the latest US jobs report is released to close out the week. For the most part, this is the one event that pretty much guarantees volatility for markets, with algorithms geared up to take advantage of any shift in the numbers.

As ever, the focus is on the potential impact the release will have upon the monetary policy. However, with markets currently pricing a rate cut at 100% likely, the numbers will instead be judged by how they impact the less likely events, such as a 50 basis point cut. With Reuters currently pricing such a rate cut at 6.8%, and Bloomberg at 17.8%, it is certainly an outside case for now. However, the impact if has upon those numbers are going to be one of the key factors for dollar traders. The relative probabilities for future rates as determined by Reuters is available below.

Non-farm payrolls numbers

The first thing markets respond to when the numbers are released is generally the non-farm payrolls number (NFP), with this figure typically the move-volatile element of the release. This month is expected to see another payrolls figure around the same region as the 164,000 number a month ago. Reuters have the poll pointing towards a figure of 159,000, and a ‘SmartEstimate’ of 164,000. Interestingly, we have seen the past four revisions come in below the first estimate, thus pointing towards the possibility of a downward revision to that 164,000 figure.

Average hourly earnings

Average earnings provides a reflection of where wages are going in the US, with this figure providing a clear link to inflation. Of course, if we see a sharp rise in earnings it will be expected to push inflation higher, restricting the Federal Reserve's (Fed’s) ability to ease monetary policy further. With the US seeing unemployment continue to fall, we are seeing a position where those already employed must be sufficiently compensated to ensure they do not leave to join a rival firm. That lack of the right available candidate is generally reflected through higher earnings and signals a recovery that is well advanced.

By and large, a rise in earnings is seen as a dollar positive effect, typically providing an increase in disposable and real income (depending on how inflation moves). Last month saw inflation rise back to 3.2% following a prior drift that saw the year-on-year (YoY) figure drift lower from the February high of 3.4%. The Reuters poll points towards a decline back to 3.1%, and a SmartEstimate of 3.06%.

Unemployment

This figure can grab the headlines, yet for the most part it is not something that markets move too heavily on unless something drastic happens. By and large, it is expected that unemployment will fall over time, and that has been the case here. Markets expect it to remain at 3.7% this month, coming off the back of a multi-decade low of 3.6% seen in May.

Charts to watch

The dollar has been a big riser throughout the past two-months, with the prospect of a Fed rate cut doing little to hold back the greenback. Interestingly we have seen the dollar index rise back into trendline resistance, dating back to 2016. With the price easing back after initially breaking higher, the ability to surge past or reverse from this level trendline could come down to Friday’s jobs report.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Be ready to act on the next non-farm payrolls report

Explore the influence the non-farm payrolls report has on American markets ahead of the next release on 2 July 2021.

  • Which markets could be more volatile after the NFP report?

  • Why was the report introduced and what does it tell us?

  • Why is the report important for traders?

Live prices on most popular markets

  • Forex
  • Shares
  • Indices
liveprices.javascriptrequired
liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.

liveprices.javascriptrequired

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.