It's the first full week of August, and all attention is on the US labor market. Following the Fed's hawkish hold on the July 29th meeting, investors' focus has shifted from central bank policy to economic data release. And arguably the most important economic report of the month? Friday's Nonfarm Payrolls.
Here's what's on the line:
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Numbers to Watch
Released Friday August 7 at 12:30 GMT, this report from the Bureau of Labor Statistics shows what's happening within the US labor market, and is expected to show a modest bounce back following a weaker June print.
Metric | Prior (June) | Forecast (July)
------- | -------- | --------
Nonfarm Payrolls | 57,000 | 88,000
Unemployment Rate | 4.2% | 4.2% - 4.3%
Private Payrolls | 49,000 | 77,000
Avg Hourly Earnings (MoM) | 0.3% | 0.3%
The consensus forecast range is 50,000 - 140,000 for NFP with 88,000 as the median forecast number. FactSet's consensus forecast is slightly lower at 87,500.
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What It Means for the Dollar
The monthly US jobs numbers are often referred to as the "most important economic indicator for forex traders", and it is certainly true that they have a strong correlation to how the overall economy is performing and closely watched by policymakers.
Here is the very basic rule of thumb:
- If the numbers come in better than expected, that is bullish for the US Dollar
- If the numbers come in worse than expected, that is bearish for the US Dollar
The actual market direction will depend on how all data in the BLS report is interpreted-previous month revisions and unemployment rates are just as important as the number one data point on Thursday.
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Technical Levels to Watch
The Dollar Index (DXY) had a dramatic turnaround following a failed attempt to break multi-year downtrend resistance, and traders are now looking at key support. The index is currently sitting on an important area of support which spans from 100.16 - 100.42.
A close below that on the weekly chart could suggest more significant correctional moves within the annual uptrend are likely. Support levels to watch are 99.41, 98.95 (key support) and 98.85 while resistance levels to watch are 100.20 - 100.50, 101.20 and 101.92. Analysts note that the current rally from may may have run out of steam and that the Dollar Index will likely retreat towards a range between 96.00 and 100.00.
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Why This Report Matters Now
The timing is key as, after the FOMC meeting on the 29th of July, there was a 9-3 split with three of the Fed's regional presidents indicating they want the rate to move now while Chair Kevin Warsh refused to rule out a hike in September.
The labor market will now provide the all-important catalyst which may shift this balance one way or the other.
A strong NFP reading (+90,000) would likely bolster the Fed's hawkish tone and push the Dollar Index higher towards resistance levels. Any bullish surprise could also see sharper downside moves in EUR/USD and other dollar pairs. A weak NFP reading (<70,000) would likely increase expectations of some easing and a faster move towards accelerating the dollar sell-off. Analysts from Octa broker advise that a poor NFP result would likely do little more than provide a temporary boost to gold and the euro due to an already baked-in expectation of a soft reading.
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The Week Leading Up
Although the primary focus will be on the employment data released on Friday, the following will also be crucial:
| Day | Event |
|----------|------------------|
| Monday | ISM Manufacturing PMI |
| Wednesday| ADP Employment Figures |
| Thursday | ISM Services PMI |
| Friday | Nonfarm Payrolls |
All of the above provide signals of the momentum the labor market is experiencing in addition to how the US economy is performing prior to the big news on Friday.
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What it Means for You
This week will likely decide the direction the US dollar will take for August.
If you are trading long on the dollar: Keep an eye on the 100.16 - 100.42 support levels. A strong reading on the jobs market could push the Dollar Index toward 101.92.
If you are trading short on the dollar: If the readings are poor, this could extend the dollar sell-off and test 98.95 before potentially exposing the larger trend of 2022.
ForEUR/USD traders, the pair is gaining momentum and rose above the 1.1500 level for the 5th day in a row amid dollar weakness throughout the broad market. How the pair reacts will likely set the tone for the following weeks.
Stay disciplined. Watch the levels. And keep your focus squarely on Friday.
