US Nonfarm Payrolls Report: Analyzing May NFP release

• US Nonfarm Payrolls is likely to show 190K jobs addition in May.
• The headline NFP and Average Hourly Earnings are likely to impact the Fed rates outlook.
• US Unemployment Rate is foreseen at 3.5% in May, up from April’s 3.4% print.

Progressing toward the United States Nonfarm Payrolls showdown, the US Dollar (USD) is on a corrective decline from two-month highs, undermined by increased bets of a US Federal Reserve (Fed) rate hike pause in June and the Congressional approval of the US debt ceiling suspension. May jobs report could hint at whether the Fed will bring an end to its tightening cycle, triggering fresh volatility around the Greenback.

Fed Chair Jerome Powell’s dovish remarks delivered last month, checked the US Dollar’s upward trajectory briefly. Speaking at the “Perspectives on Monetary Policy” panel at the Thomas Laubach Research Conference, Powell said the recent banking crisis, which led to tighter credit standards, has eased the pressure to hike interest rates. "Our policy rate may not need to rise as much as it would have otherwise," he added. Ever since, the US Dollar has been on a roll higher on the back of the hawkish rates outlook by several Fed policymakers, strong US economic data and the US debt deal optimism.

In a Financial Times (FT) interview earlier this week, Cleveland Federal Reserve Bank President, Loretta Mester, noted that there is no ‘compelling’ reason to wait for a fresh rate rise, adding that the “debt-ceiling deal removes a big piece of uncertainty over the US economy.”

However, Philadelphia Fed President, Patrick Harker, and Fed Governor, Philip Jefferson, said that they favor a rate hike pause in June, which prompted investors to assess the prospect of a pause in the tightening cycle by the Fed this month. In the face of the dovish Fedspeak, the probability of a 25 basis points (bps) Fed rate hike in June dropped from about 62% to 38%, where it now stands.

What to expect in the next Nonfarm Payrolls report?

This Friday, the all-important United States (US) monthly labor jobs report data for May will stand out. Markets are expecting the US economy to have created 190K jobs during the reported month, compared with the above estimates of 253K reported in April. The Unemployment Rate is foreseen at 3.5% in the fifth month of this year, up from the 3.4% growth seen in April.

The Average Hourly Earnings are likely to grab the eyeballs apart from the headline Nonfarm Payrolls print, as it could shed light on the country’s wage inflation, which could impact the Fed’s rates outlook. The Average Hourly Earnings is seen rising at the same pace in May as registered in April, at 4.4% on a yearly basis.

It’s also worth noting that the data published by Automatic Data Processing (ADP) showed on Thursday that private sector employment in the US rose by 278,000 in May. This reading followed the 291,000 increase recorded in April and surpassed the market expectation of 170,000 by a wide margin. Additionally, the Employment Index of the ISM’s Manufacturing PMI survey rose to 51.4 in May from 50.2, revealing an increase in employment in the manufacturing sector.

Analysts at TD Securities expect a slight slowdown in the payrolls growth in May: “US payrolls likely slowed modestly in May, advancing at a still strong 200k+ pace for a second consecutive month. We also look for the UE rate to stay unchanged at a historical low of 3.4%, and for wage growth to print 0.3% m/m (4.4% y/y).”

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

The Nonfarm Payrolls report is scheduled for release at 12:30 GMT, on June 2. EUR/USD has regained the 1.0700 level heading into the critical US jobs report. Therefore, it will be interesting to gauge whether the labor market data could help sustain the renewed upside in the main currency pair.

An above-forecast headline NFP print alongside a hotter wage inflation data would cement a case for another 25 basis points (bps) Fed rate hike on June 14, in turn, strengthening the ongoing upsurge in the US Dollar at the expense of the Euro.

Conversely, the US Dollar could come under intense selling pressure should the jobs data disappoint markets and pour cold water on expectations of any further rate increases by the Fed. EUR/USD could stage a solid upswing in reaction to the downbeat US employment data.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the EUR/USD pair and writes: “With the 14-day Relative Strength Index (RSI) still lurking below the midline, the ongoing recovery in the EUR/USD pair appears at risk. Further, the 21-Daily Moving Average (DMA) is looking to pierce the flattish 100 DMA from above, warranting caution for EUR/USD buyers.”

Dhwani also outlines important technical levels to trade the EUR/USD pair: “On the upside, Euro buyers need acceptance above the confluence resistance near 1.0820, where the 21 and 50 DMA close in. Ahead of that, EUR/USD must recapture the 1.0800 psychological mark. Alternatively, immediate support awaits at the 1.0700 round figure, below which the previous day’s low at 1.0661. The line in the sand for Euro bulls is seen at the May low of 1.0635.”

About the Nonfarm Payrolls report

The Nonfarm Payrolls released by the US Department of Labor presents the number of new jobs created during the previous month, in all non-agricultural business. 

The monthly changes in payrolls can be extremely volatile, due to its high relation with economic policy decisions made by the US Federal Reserve. The number is also subject to strong reviews in the upcoming months, and those reviews also tend to trigger volatility in the forex board. 

Generally speaking, a high reading is seen as positive (or bullish) for the US Dollar, while a low reading is seen as negative (or bearish), although previous month's reviews and the Unemployment Rate are as relevant as the headline figure.