NFP Preview: US Dollar Bounce Potential if Jobs Data Doesn’t Disappoint

NFP Report Key Points

• NFP report expectations: +185K jobs, +0.3% m/m earnings, unemployment at 3.9%
• Leading indicators point to a slightly above expectation reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 175-225K range.
• The US Dollar Index (DXY) is testing 104.00 support, setting the stage for a potential bounce in the greenback as long as the jobs data is decent.

When is the May NFP Report?

The May NFP report will be released on Friday, June 7 at 8:30 ET.

NFP Report Expectations

Traders and economists expect the NFP report to show that the US created 185K net new jobs, with average hourly earnings rising 0.3% m/m (3.9% y/y) and the U3 unemployment rate holding steady at 3.9%.

NFP Overview

After a blistering start to the year, the US economy has seemingly downshifted in Q2 based on recent data. That said, the key indicators the Federal Reserve focusses on (employment and inflation, as measured by the Core PCE) have yet to roll over meaningfully, meaning the Fed will likely be content to leave interest rates unchanged in its upcoming monetary policy meeting later this month.

In terms of the NFP report, traders and economists are anticipating a slight moderation from last month’s strong jobs growth, with wages and the unemployment rate expected to come in roughly in line with recent trends:

Source: StoneX

From a bigger picture perspective, the July Fed meeting is the earliest most traders can see the central bank considering an interest rate cut, and it will take a dramatic softening in the labor market to bring that possibility more meaningfully into play. As a result, market volatility in reaction to NFP may be somewhat subdued unless we see a big slowdown in the labor market this month.

NFP Forecast

As regular readers know, we focus on four historically reliable leading indicators to help handicap each month’s NFP report:

• The ISM Services PMI Employment component bumped up to 47.1 from 45.9 last month.
• The ISM Manufacturing PMI Employment component rose to 51.1 from 48.6 last month.
• The ADP Employment report showed 152K net new jobs, down from last month’s 188K reading.
• Finally, the 4-week moving average of initial unemployment claims ticked up to 222K, up from 210K last month to near the highest level in 9 months.

Weighing the data and our internal models, the leading indicators point to a slightly above expectation reading in this month’s NFP report, with headline job growth potentially coming in somewhere in the 175-225K range, albeit with a big band of uncertainty given the current global backdrop.

Regardless, the month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts (including ours). As always, the other aspects of the release, prominently including the closely-watched average hourly earnings figure which came in at just 0.2% m/m in the most recent NFP report.

Potential NFP Market Reaction

As we outline below, the US Dollar Index is testing the bottom of its 11-week range at 104.00 after a big selloff last week. With only a couple top-tier economic reports between today and the July Fed meeting, a decent jobs report could be enough for traders to close the door on a July rate cut and boost the greenback.

US Dollar Technical Analysis – US Dollar Index (DXY) Chart

Source: TradingView, StoneX

As the chart above shows, the US Dollar Index has spent most of this week consolidating just above key previous support in the 104.00 area. This zone has put a floor under price on five previous occasions dating back to late March, and while a big miss in the NFP report could absolutely lead to a breakdown, the odds may be shaded toward a potential bounce in DXY (and equivalent drops in pairs like EUR/USD, GBP/USD, and AUD/USD) as long as the jobs report comes in near expectations.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX