US NFP Forecast: Nonfarm Payrolls expected to slow sharply in October after September upside surprise

• US Nonfarm Payrolls are forecast to rise by 180K in October, nearly halving from September’s 336K increase.
• Headline NFP and Average Hourly Earnings data are set to significantly impact the US Dollar.
• The Bureau of Labor Statistics is due to publish the United States employment data at 12:30 GMT.

The Bureau of Labor Statistics (BLS) is due to release the highly-anticipated Nonfarm Payrolls (NFP) report from the United States (US) on Friday, which could have major ramifications for US Federal Reserve (Fed) policy outlook. The US Dollar (USD) is poised for a big reaction to the labor market data, as NFP data tends to infuse intense volatility across the FX board.

The Fed on Wednesday kept the policy rate steady in its current 5.25%-5.50% range, as widely expected. The US Dollar, however, succumbed to the sell-off in the US Treasury bond yields after Fed Chair Jerome Powell remained non-committal on the need for further tightening. Although Powell did not rule out another hike, markets perceived his words as not-so hawkish as they expected. Powell acknowledged tighter financial conditions while adding that taming inflation will most likely require a slowdown in growth and dampening in the labor market.

Earlier on Wednesday, Automatic Data Processing (ADP) said the US private sector payrolls rose 113K in October, compared with a 89K job addition in September while below the estimate of 150K. The Job Openings and Labor Turnover Summary (JOLTS) report showed that the number of job openings on the last business day of September stood at 9.553M, slightly up from a revised 9.497M in August and ahead of the 9.25M forecast.

The US employment data continued to portray persistent labor market tightness, which if confirmed by a strong October Nonfarm Payrolls data on Friday could bring back Fed rate hike bets on the table.

Markets are now pricing in only a 20% chance of a rate increase in December, down from 29% on Tuesday, with 25% odds of a raise in January, down from 39% on Tuesday, according to the CME Group’s FedWatch Tool. Markets seem to have priced in a 70% chance that the Fed is done hiking rates, and are even expecting rate cuts amounting to 85 basis points (bps) next year, starting as early as June.

What to expect in the next Nonfarm Payrolls report?

Friday’s Nonfarm Payrolls data is likely to show that the US economy added 180K jobs last month, almost halving from a job addition of 336K in September. The Unemployment Rate is expected to hold steady at 3.8% in the reported month.

Average Hourly Earnings, a measure of wage inflation, will be also closely scrutinized for its impact on the Fed interest rates outlook. Average Hourly Earnings are seen rising 4.0% over the year in October, slowing from a 4.2% increase in September. On a monthly basis, Average Hourly Earnings are seen a tad higher at 0.3% in October, as against a 0.2% increase in September.

Analysts at TD Securities noted, “Job gains likely lost meaningful speed in Oct, with payrolls mean-reverting post booming Sep report (it will also reflect an impact on mfg jobs due to the UAW strike). We look for the UE rate to stay unchanged at 3.8%, and for wage growth to print 0.2% MoM.”

When will US October Nonfarm Payrolls data be released and how could it affect EUR/USD?

The Nonfarm Payrolls, a widely watched indicator of the US labor market, will be published at 12:30 GMT. EUR/USD is struggling to extend the renewed uptick above 1.0600, despite the dovish Fed expectations. It remains to be seen if the US employment data will help the pair find acceptance above the latter.

An upbeat NFP headline print and hot wage inflation data could reignite expectations of a December Fed rate hike, offering much-needed support to the US Dollar while dragging EUR/USD back toward 1.0500. On the other hand, the US Dollar could resume its correction from multi-week highs, if the data comes in weak and fans expectations that the Fed’s tightening cycle is over. In such a case, EUR/USD could extend its recovery toward 1.0750.

Dhwani Mehta, Analyst at FXStreet, offers a brief technical outlook for trading EUR/USD on the NFP data release. “The main currency pair has moved away from near weekly highs of 1.0675, although remains hopeful as the 14-day Relative Strength Index (RSI) holds well above the midline. The immediate resistance is aligned at the weekly high of 1.0675, above which the 1.0700 level could be retested en-route the psychological 1.0750 barrier.”

“On the flip side, the 21-day Simple Moving Average (SMA) at 1.0582 could lend some support to buyers if the downswing kicks in. The next relevant cushion is seen at the two-week low of 1.0517,” Dhwani adds.