Nonfarm Payrolls forecast: US job growth set to rebound in February after weak January data

• Nonfarm Payrolls are expected to rise by 160K in February, following the 143K increase reported in January.
• The Unemployment Rate is forecast to remain unchanged at 4%.
• Markets could reassess the possibility of a Fed rate cut in May after employment data.

The United States (US) Bureau of Labor Statistics (BLS) will publish the highly-anticipated Nonfarm Payrolls (NFP) data for February on Friday at 13:30 GMT.

Growing concerns over US President Donald Trump's trade policy causing an economic downturn in the US have been driving the action in financial markets lately. The details of the employment report could influence the Federal Reserve's (Fed) policy outlook and impact the US Dollar's (USD) valuation. 

What to expect from the next Nonfarm Payrolls report?

Markets expect NFP to rise by 160,000 in February, following the disappointing 143,000 increase recorded in January. The Unemployment Rate is forecast to remain unchanged at 4%, and annual wage inflation, as measured by the change in the Average Hourly Earnings, is seen holding steady at 4.1%.

Previewing the February employment report, TD Securities analysts said: "Payroll gains likely remain steady at just below 150k for a second consecutive month in February following last month's underwhelming 143k increase."

"High-frequency data suggest job creation wasn't as strong as February last year. We also expect the Unemployment Rate to move higher to 4.1% while wage growth likely mean-reverted to 0.2% m/m as hours worked normalize in February," they added.

Meanwhile, the data published by the Automatic Data Processing (ADP) showed on Wednesday that private sector payrolls rose by 77,000 in February, missing the market expectation of 140,000 by a wide margin.

How will US February Nonfarm Payrolls affect EUR/USD

The US Dollar has been struggling to outperform its rivals since the beginning of the year, even though markets have been pricing in a delay in the continuation of the Federal Reserve's policy easing. After losing about 0.9% in February, the USD Index, which gauges the USD's valuation against a basket of six major currencies, is already down more than 3% in March, pressured by heightened fears over an economic downturn in the US.

Earlier in the week, the data from the US showed that ISM Manufacturing Purchasing Managers Index (PMI) declined to 50.3 in February from 50.9 in January. The Employment Index of the PMI survey slumped to 47.6 from 50.3 and showed a contraction in the sector's payrolls. The Atlanta Fed revised its Gross Domestic Product (GDP) projection in its GDPNow report to -2.8% for the first quarter from -1.5% on February 28. "The nowcast of first-quarter real personal consumption expenditures growth and real private fixed investment growth fell from 1.3% and 3.5%, respectively, to 0.0% and 0.1%," the publication read.

Additionally, the Trump administration's decision to go ahead with the 25% tariffs on Canadian and Mexican imports, as well as the additional 10% tariffs on Chinese goods, this Tuesday triggered retaliatory responses from Canada and China. In turn, investors have to consider the potential negative impact of a deepening trade war on the US economy. According to the CME FedWatch Tool, the probability of a Fed rate cut in May has increased to nearly 40% from about 25% in the previous week.

Hence, a disappointing labor market report, with an NFP reading below 120,000, could feed into expectations for a 25 basis points reduction in interest rates in May. In this scenario, the USD is likely to stay under selling pressure and open the door for a leg higher in EUR/USD. On the other hand, market participants could refrain from pricing in a May rate cut if the NFP offers a positive surprise with a print above 170,000. In addition to growing signs of an economic slowdown in the US, Fed policymakers also have to assess how tariffs could affect inflation and inflation expectations.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a brief technical outlook for EUR/USD: 

"The Relative Strength Index (RSI) indicator on the daily chart rose above 70 for the first time since August, reflecting overbought conditions for EUR/USD. The Fibonacci 61.8% retracement level of the October-January downtrend aligns as a pivot level in the near term. Once EUR/USD stabilizes above this level and confirms it as support, 1.0900 (static level, round level) could be seen as next resistance before 1.0970 (Fibonacci 78.6% retracement)."

"In case EUR/USD fails to hold above 1.0800, the 200-day Simple Moving Average aligns as a key technical level at 1.0720. A daily close below this support could pave the way for a deeper correction toward 1.0570 (Fibonacci 38.2% retracement)."