Nonfarm Payroll Preview Will It Come Higher, and Does It Actually Matter?

As we approach the end of the month, all eyes are on the upcoming NFP day, a pivotal event that often dictates market direction. There's a growing sense of optimism that this Friday's NFP report could outperform, potentially fuelling a rally in the USD and even breaking the recent high of 106.521 set on April 17th.

USD Index

 Source: Finlogix ChartsOne compelling reason for this optimism is the consistent trend of NFP reports surpassing consensus expectations throughout the year. While past performance doesn't guarantee future results, there's a strong possibility that this trend will persist, leading to another round of robust NFP figures. It's crucial to dissect where these job gains are coming from.

Thankfully, accessing such data is straightforward, with platforms like the USA Bureau of Labor Statistics (BLS) offering valuable insights. For example, March saw an impressive addition of 303,000 jobs, with notable contributions from sectors such as healthcare, government, and construction.

BLS Website

 Source: BLS However, it's not just the headline NFP figure that investors are watching; the unemployment rate holds equal importance, especially amid expectations of no change from the previous month. This anticipated stability could trigger significant market movements. Reflecting on historical data, it's clear that recent releases have been mixed, with some exceeding expectations while others fell short. This uncertainty underscores the importance of approaching Friday's report with caution, particularly considering recent underwhelming performances in both Services and Manufacturing PMIs, which could signal potential economic headwinds.

Delving deeper into the June FOMC projection materials reveals a divergence in outlook. The Fed's projected unemployment rate of 4.6% contrasts sharply with the market consensus of 3.8%, suggesting a potential disparity between Federal Reserve expectations and market sentiment. Such discrepancies could result in a higher-than-expected unemployment figure.

Considering the broader market dynamics, there's a palpable sense of normalization underway, indicating a potential uptick in hiring activity. This normalization could, in turn, bolster the US dollar's position, exerting downward pressure on currency pairs like EURUSD (have a look at my analysis here) and GBPUSD. As Friday looms closer, it's imperative to remain vigilant and prepared for potential market fluctuations driven by the NFP and unemployment data.

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