Nonfarm Payrolls expected to show modest hiring rebound in August after July's tepid report

• US Nonfarm Payrolls are forecast to rise 160K in August after gaining merely by 114K in July.
• The United States Bureau of Labor Statistics will release the critical jobs report on Friday at 12:30 GMT.
• The employment data could help gauge the size of the Fed interest-rate cut in September, rocking the US Dollar.

The United States Bureau of Labor Statistics (BLS) will publish August's highly anticipated Nonfarm Payrolls (NFP) data on Friday at 12:30 GMT.

The US labor market data hold the key for markets to gauge the size of the expected interest-rate cut by the US Federal Reserve (Fed) in September, ramping up the volatility around the US Dollar (USD).

What to expect in the next Nonfarm Payrolls report?

The Nonfarm Payrolls report is forecast to show that the US economy added 160,000 jobs in August, after creating 114,000 in July.

The Unemployment Rate is likely to dip to 4.2% in the same period from July's 4.3% reading. Meanwhile, a closely-watched measure of wage inflation, Average Hourly Earnings, is seen increasing by 3.7% in the year through August after rising 3.6% in July.

The August employment data will offer significant insights into the strength of the US labor market, which are critical to shaping the Fed interest-rate outlook at the September 17-18 policy meeting and beyond.

Fed Chairman Jerome Powell indicated during his opening remarks at the Jackson Hole Symposium last month that an "unwelcome further cooling in the labor market" could warrant more aggressive policy action, fanning a 50 basis point (bps) interest rate cut.

Meanwhile, the Fed tweaked its July policy statement to mention that it is "attentive to the risks to both sides of its dual mandate", rather than previously only noting its attention to inflation risks.

Previewing the August employment situation report, TD Securities analysts said: "We expect US payrolls to rebound just north of the 200k mark in August following July's downside surprise. The UE rate likely retraced a tenth to 4.2% with wages rising a firmer 0.3% MoM."

How will US August Nonfarm Payrolls affect EUR/USD?

The US Dollar (USD) has resumed its downward momentum against its major rivals, sending the EUR/USD pair back toward the 1.1100 threshold. Will the US NFP report double down on the dovish Fed expectations, perking up EUR/USD at the expense of the USD?

In the lead-up to the US NFP showdown, weak Institute for Supply Management (ISM) Purchasing Managers Index (PMI) data raised concerns over a potential 'hard landing' for the US economy amid fresh signs of loosening labor market conditions.

The ISM announced on Tuesday that its headline US Manufacturing Index improved slightly to 47.2 in August from July's 46.8 but remained in contraction while below the estimated 47.5 print. Data on Wednesday showed that US Job Openings dropped to a 3-1/2-year low in July, arriving at 7.67 million, following the 7.91 million openings in June while below the expected 8.1 million. The Automatic Data Processing (ADP) reported on Thursday that the US private sector employment increased by 99,000 jobs in August after rising by a downwardly revised 111,000 in July.

Discouraging US economic data ramped up bets for a 50 bps interest-rate cut by the Fed at its September meeting. Markets are now pricing in a 47% chance of an outsized 50 bps rate cut by the Fed later this month, up from 31% at the start of this week, according to the CME Group's FedWatch tool.

If the headline NFP figure surprises with payroll growth below 100,000, it could bolster the odds of a big cut in September, exacerbating the US Dollar's pain while pushing EUR/USD further north. Conversely, a strong NFP print combined with hot wage inflation data would pour cold water on aggressive Fed rate cut prospects for this month, boosting hopes that the Fed may opt for a more modest 25 bps rate reduction. This could fuel a decent US Dollar comeback, reinforcing fresh EUR/USD selling back toward 1.0900.

Dhwani Mehta, Analyst at FXStreet, offers a brief technical outlook for EUR/USD: 

"The EUR/USD pair defends the 21-day Simple Moving Average (SMA) at 1.1061, having recaptured it on Wednesday. The 14-day Relative Strength Index (RSI) points north well above the 50 level, currently near 58, suggesting that buyers are likely to remain in charge in the near future."

"Buyers need to crack the year-to-date high of 1.1202 recorded last month to take on the 1.1250 psychological barrier. Further up, the July 18, 2023, high of 1.1276 will challenge the bearish commitments. Alternatively, acceptance below the 21-day SMA at 1.1061 is critical for a sustained correction. The next healthy support levels are seen at the 1.1000 round figure and the 50-day SMA at 1.0939," Dhwani adds.