US data is about to be released. Can the non-farm employment report reverse the dollar's decline?

Key Data Overview

The U.S. Bureau of Labor Statistics is scheduled to release the September non-farm payrolls (NFP) data on Thursday at 13:30 Beijing time. This report is crucial for dollar traders as it will directly influence market expectations regarding the Federal Reserve’s future policy direction.

According to consensus forecasts by economists, non-farm employment is expected to increase by 50,000 jobs in September, a significant rebound from August’s 22,000. The unemployment rate is expected to remain steady at 4.3%, while the average hourly earnings (AHE), a key inflation indicator, are projected to grow by 3.7% year-over-year, unchanged from August.

Market Expectations for the Data

TD Securities’ analysis team offers a more aggressive forecast. They believe employment growth in September could rebound to 100,000, with private sector employment increasing by 125,000, while government jobs may decrease by 25,000. They also expect the month-over-month growth in average hourly earnings to slow to 0.2% (year-over-year 3.6%).

This employment report is highly anticipated because it will be the last comprehensive employment data before the Federal Reserve’s December policy meeting. Although September’s data may have some lag, it remains an important reference for assessing the Fed’s potential rate cuts in the coming months.

The Delicate Balance of USD Movement and Fed Expectations

Recently, Federal Reserve officials have made cautious remarks, coupled with soft private sector employment data, leading to a decline in market expectations for a 25 bps rate cut at the December meeting. According to CME Group’s FedWatch tool, after the release of the October meeting minutes, the probability of a rate cut in December dropped from 50% to 33%, well below the 65% from a week earlier.

The October minutes explicitly warned that lowering borrowing costs could weaken efforts to combat inflation. This divergence among policymakers has kept the market cautious about further easing measures.

Mixed Signals from the Latest Employment Data

Automatic Data Processing (ADP) reported a 42,000 increase in private sector jobs in October, exceeding expectations by 25,000, which seemed to send a positive signal. However, Challenger, Gray & Christmas, an executive outplacement firm, reported a different story—layoffs announced by companies surged by 183.1% month-over-month, marking the worst October in over 20 years.

The manufacturing sector also faced pressure. The Institute for Supply Management (ISM) October Manufacturing PMI came in at 48.7, below the expected 49.5. However, the services sector performed relatively strongly, with the ISM Services PMI unexpectedly rising to 52.4 last month, supported by a significant increase in new orders.

Where is EUR/USD Headed — Depends on September Employment Data Strength

The recent rebound of the dollar against major currencies pushed EUR/USD below 1.1600. The future direction of this currency pair will largely depend on the upcoming U.S. data.

Bearish Scenario: If non-farm employment falls below 50,000 and the unemployment rate unexpectedly rises, it will confirm a weakening U.S. labor market, reigniting market bets on a December rate cut. The dollar will face strong selling pressure, and EUR/USD could rebound to 1.1700.

Bullish Scenario: If the report shows a significant acceleration in employment growth, with the unemployment rate holding at 4.3% or falling further, strong employment data will dispel expectations of a December rate cut and provide solid support for the dollar. EUR/USD could continue its downward trend, targeting below 1.1400.

Technical Outlook

Dhwani Mehta, Chief Analyst at FXStreet Asia, provides a detailed technical outlook. EUR/USD broke below the 21-day simple moving average (SMA) at 1.1574 at the Wednesday close, and the 14-day Relative Strength Index (RSI) on the daily chart remains below the midline, increasing the likelihood of further declines.

Support levels are at the November 5 low of 1.1469 and the 200-day SMA at 1.1395. A break below the psychological level of 1.1350 would fully undermine the buyers’ defense.

On the upside, the 21-day SMA (1.1574) acts as the first resistance. If the pair can stabilize above this level, the next bullish target is around 1.1650, which is also the confluence point of the 50-day and 100-day SMAs. Further upward movement faces the challenge of the 1.1700 round number.

In summary, the upcoming U.S. employment data will be a key turning point in determining the short-term trend of EUR/USD. Traders should closely monitor whether this employment report can alter the current narrative of dollar strength.