US Nonfarm Payrolls Forecast: June NFP release expected to show moderating job creation

• US Nonfarm Payrolls data is likely to report 225K in June vs. 339K seen in May.
• The headline NFP and Average Hourly Earnings are key to the Fed’s rate hike outlook.
• US Unemployment Rate is seen a tad lower at 3.6% in June from May’s 3.7% reading.

Following the releases of significant US employment data in the holiday-shortened week, the US Dollar (USD) is geared up for the all-important US Nonfarm Payrolls report due this Friday, which will likely lead to a recalibration of the US Federal Reserve (Fed) rate hike bets in the second half of this year.

Renewed US-China trade tensions, combined with mounting recession fears in the world’s largest economy, are helping the US Dollar find its feet heading toward the highly-anticipated US labor market data. Absent Fedspeak, thin trading and weak US ISM Manufacturing PMI data weighed on the Greenback in the early part of the week.

On Monday, the ISM Manufacturing PMI in the United States shrank for eight consecutive months to 46.0 in June, hitting the lowest level since May 2020. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said that “the health of the US manufacturing sector deteriorated sharply in June, fueling fears that the economy could slip into a recession in the second half of the year.”

In response to the data, the closely-watched spread between the 2-year and 10-year US Treasury bond yields hit the widest since 1981, a deeper inversion than the one witnessed in March during the US regional banking crisis. The yield differential between 2 and 10-year Treasuries has been inverted since last July so Monday’s inversion is not unusual but the magnitude of inversion is a signal that a US economic recession is inevitable.

What to expect in the next Nonfarm Payrolls report?

Amidst mounting recession fears and hawkish Fed expectations, markets eagerly look forward to Friday’s critical United States (US) jobs data for June to provide a fresh directional impetus to the US Dollar.

The US economy is widely expected to have added 225K jobs in the sixth month of the year, compared with a 339K jobs growth reported in May. The Unemployment Rate is expected to tick down to 3.6% in June vs. 3.7% reported in May.

Apart from the headline Nonfarm Payrolls number, the Average Hourly Earnings will be closely scrutinized for fresh hints on the country’s wage inflation, which has a strong bearing on the Fed rate hike prospects. The Average Hourly Earnings are seen rising 4.2% on a yearly basis in June as against a 4.3% increase booked previously.

The US labor market remains very tight, as aptly portrayed by the latest data published by Automatic Data Processing (ADP) on Thursday. The United States private sector employment rose by 497,000 in June, followed by the 267,000 increase recorded in May while outpacing estimates of 228,000 by a wide margin. Meanwhile, JOLTS Jobs Openings came in at 9.82 million at the end of May, dropping from an upwardly revised 10.3 million in April, just missing the expectations of 9.935 million.

Analysts at TD Securities noted, “we look for payrolls to stay strong in June, though they would still be losing momentum at the margin following more robust increases in April-May. We also expect the UE rate to drop a tenth to 3.6% as we are assuming job creation in the household survey will normalize after the May plunge. Average hourly earnings likely advanced 0.3% m/m, with the y/y measure staying unchanged at a still-elevated 4.3%.”

When will US June Jobs Report data be released and how could it affect EUR/USD?

The Nonfarm Payrolls number, part of the US jobs report, will be released at 12:30 GMT on July 7. EUR/USD has been struggling around the 1.0900 level so far this week. The labor market data could help determine whether the US Dollar will maintain the upper hand against the Euro.

Stronger-than-expected NFP numbers and hot wage inflation data would strengthen expectations of more Fed tightening in the upcoming months, in line with the Fed’s Dot Plot chart, which suggested two more rate hikes ahead. Fed Chair Jerome Powell also said last week that “a strong majority of Fed policymakers expect two or more rate hikes by year-end.”

Alternatively, the US Dollar could give up the recovery gains and resume its downtrend on signs of cooling wage inflation and below-forecasts NFP data. Downbeat data could raise doubts about the chances of any further rate increases by the Fed after the expected 25 basis points (bps) July hike. In such a scenario, EUR/USD could see a fresh advance toward 1.1000.

Meanwhile, Dhwani Mehta, Asian Session Lead Analyst at FXStreet, offers a brief technical outlook for the EUR/USD pair and explains: “The main currency pair is clinging to the bullish 21-Daily Moving Average (DMA) at 1.08890 in the run-up to the US NFP showdown. EUR/USD buyers could find some support, as the 14-day Relative Strength Index (RSI) sits just above the midline.”

Dhwani also outlines important technical levels to trade the EUR/USD pair: “On the upside, Euro buyers need to find a strong foothold above the 21 DMA barrier at 1.0890 to sustain the previous rebound, with eyes on the 1.0950 psychological barrier. The next critical resistance is seen at the June top of 1.1012. Conversely, immediate support awaits at the mildly bearish 50 DMA at 1.0857, below which the horizontal 100 DMA at 1.0828 will limit the downside. The last line of defense for Euro buyers is envisioned at the 1.0750 key level.”