The dollar may start weakening earlier than usual on weak U.S. unemployment data

• The U.S. Labour Department will be reporting on Friday, 2 February. The Nonfarm Payroll (NFP) is expected to increase by 180,000 jobs in January. The unemployment rate is forecast to rise to 3.8% from 3.7% in December.
• Since early 2024, financial market participants have focused more on labour market data rather than consumer inflation, which signals a possible hard landing.
• Nascent problems in the U.S. labour market may trigger earlier stimulus from the Fed. If so, the U.S. dollar will depreciate against all major asset groups after releasing the U.S. labour market data.

The U.S. Labour Department will be reporting on Friday, 2 February. The Nonfarm Payroll (NFP) is expected to increase by 180,000 jobs in January. The unemployment rate is forecast to rise to 3.8% from 3.7% in December.

Historically, financial market participants look to U.S. consumer inflation data and U.S. labour market data to predict the actions of the U.S. Federal Reserve. Consumer inflation expectations for the next 12 months fell to 5.2%, down from 5.5% in December. When viewed through the lens of consumer price changes, the perception of a recession has weakened further this year. However, the weak labour market is increasingly in the spotlight in the soft landing debate as hiring stalls and layoffs increase. Meanwhile, unemployment is at an all-time low of 3.7%.

'As price growth slows, it is affecting the revenues and profits of companies, which are responding to lower revenues by launching optimisation processes, including labour cuts', said Kar Yong Ang, the Octa financial market analyst. 'So by the end of the year, the unemployment rate could double, which could be described as a hard landing for the U.S. economy', he added.

Nascent problems in the U.S. labour market could trigger earlier stimulus from the Fed. If so, when the U.S. labour market data is released this Friday, traders should focus on the trading opportunity of a weakening U.S. dollar against all major asset groups. For foreign currency traders, it means the USDJPY is likely to fall. The main target is 141.00–142.00.