Non-farm payrolls preview: will NFP spark a dollar sell-off?

How will Friday’s US jobs report shape the dollar going forward?

The jobs report brings volatility

Friday heralds the return of the US jobs report in what will almost certainly be one of the most volatile periods of the week. That volatility is largely evident each time around, with the various elements of the report bringing some form of surprise for the most part. For markets, there is always a focus on what impact these figures will make on the Federal Reserve (Fed) thinking, with the Reuters probability distribution showing a 70% chance of a rate cut at the 30 October meeting. Should we see further weakness in the US economic picture, it would be expected to manifest itself in a greater expectation of a rate cut and a lower US dollar. Similarly, should we see signs of strength on Friday, that 70% figure would likely drop to the benefit of the greenback.

Non-farm payrolls numbers

Markets will typically respond to the headline non-farm payroll (NFP) figure, with markets largely expecting to see an improved figure compared with the 130,000 seen a month ago. For anyone looking to the ADP for confirmation of such a move wont have found it, with that number coming in at 135,000, alongside a sharp downward revision to the prior figure of 195,000 (down to 157,000). Market expectations point towards a figure close to 140,000-145,000 this time around.

Average hourly earnings

Beyond that initial reaction to the NFP figure, markets will look to the average hourly earnings as a gauge of business confidence and potential future inflation. With the US economy approaching full employment, it makes sense that firms find it difficult to hire and thus pay better wages. Wages are a cost to firms, and thus higher wages will in turn manifest themselves in higher prices and inflation. Keep an eye out for average earnings, with the prior figure of 0.4% expected to drop to 0.3%.

Unemployment

Unemployment is usually a headline grabber, yet the slow and steady nature of this indicator means that the market reaction can often be muted. Markets are looking for a possible drop to 3.6% following the rate of 3.7% seen over the past three months.

Chart to watch

The dollar has been on the rise of late, with this week seeing the dollar index hit the highest level in over two years on Tuesday. However, that rally is fading as we head towards the end of the week. With an ascending trendline potentially limiting upside, there is a good chance we could see the dollar index bull back once again. Much of that will be down to whether we do see a weak set of numbers to ramp up rate hike expectations from the Fed.

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