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NFP Preview: Could US jobs data finally spark a dollar rebound?

The US dollar has clearly been heavily pressured throughout most of this year, and the pressure has shown very few signs of relenting. The sharp downward trend that has developed through the first seven months of the year has partly been driven by a cumulative realization that the Trump Administration’s pro-growth promises may not be as readily achieved as previously thought. Other related drivers of dollar weakness have been persistently weak inflation and lackluster economic data that have led to an increasingly hesitant Federal Reserve, which has recently begun to suppress expectations of many more interest rate hikes going forward.

This recent dovish turn for the Fed has been especially prominent because it is seen to be in stark contrast against other major central banks that have started to become (or at least appear) more hawkish. As a result, the dollar’s slide has taken an even sharper downward trajectory within the past month, pressured relentlessly by rising currency rivals – most notably, the euro, Australian dollar, and Canadian dollar.

Against this backdrop of a rapidly weakening US dollar, Friday brings the potentially pivotal US jobs report for July, which features the headline non-farm payrolls (NFP) data release. Also to be reported will be critical wage growth and unemployment data for July. Though the latest sharp dollar slide appears to have been overdone, having already priced-in a great deal of the dollar-negative expectations currently pervading the economy and markets, it will likely take a truly stellar outcome for US jobs on Friday to trigger any potential reversal, or even just a meaningful rebound, for the dollar.

In the run-up to this data release, key jobs-related economic data have tentatively suggested that Friday’s numbers may ultimately fail to provide that stellar outcome. If this is indeed the case, the dollar is likely to be pressured even further in the short-term.

NFP Expectations

Consensus expectations for Friday’s NFP, which will be accompanied by key related data on the unemployment rate and wage growth, are currently around 180,000 jobs added for the month of July. The July unemployment rate is expected to have dropped to 4.3% from the previous month’s 4.4%, while average hourly earnings are expected to have increased by 0.3% against the previous month’s 0.2% wage growth.

Jobs Data Preceding NFP

Key employment-related data releases for July preceding Friday’s NFP included the ADP private employment report, ISM non-manufacturing and manufacturing PMI employment components, and weekly jobless claims data throughout the month.

Wednesday’s ADP data showed modestly worse-than-expected numbers at 178,000 private jobs added in July against previous forecasts of around 187,000. However, June’s ADP numbers were revised up from the less-than-forecast 158,000 that was originally reported to a significantly better 191,000. Although the ADP report is not necessarily a very accurate pre-indicator of the official NFP jobs data from the US Labor Department – and sometimes even misses the mark dramatically – it does help provide a useful guideline when used in conjunction with other employment-related data.

One of the most important of these other indicators is the ISM non-manufacturing (services) PMI employment component, which showed a slower pace of job growth at 53.6 in July than in the previous month (55.8). In addition, the ISM manufacturing PMI employment also grew more slowly in July at 55.2 versus June’s 57.2.

Finally, July’s weekly jobless claims were mostly in-line with expectations, generally remaining very low overall from a historic perspective. Of the four weeks that made up the bulk of July, unemployment claims once again fluctuated around the 240,000 region, with only one of those weeks significantly beating expectations.

Forecast and Potential Market Reaction

Overall, while there were no abnormally large downside surprises in pre-NFP employment indicators for July, there was a slight inclination towards the softer side when it came to July’s job numbers. This could mean that a much better-than-expected result, while certainly possible, is not the likeliest scenario. With consensus expectations of around 180,000 jobs added in July, our target range is 160,000-180,000. As noted above, only a stellar outcome well above our target range is likely to help prompt a potential rebound and recovery for the dollar. Any result falling within our target range or below will likely help extend the dollar slide in the near-term, prolonging the sustained pressure and major downward trend.

NFP Jobs Created and Potential USD Reaction

> 200,000
Strongly Bullish

Moderately Bullish

Neutral to Slightly Bearish

Moderately Bearish

< 140,000
Strongly Bearish

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