Nonfarm Payrolls set to show hiring moderated in July as US labor market cools

• United States Nonfarm Payrolls are foreseen at 110,000 in July, down from the 147,000 posted in June.
• The US Unemployment Rate is expected to have ticked higher to 4.2% from 4.1% in the month.
• The US Dollar ends July with solid gains, reversing a five-month losing streak.

A pretty wild week is coming to an end with the release of the all-important United States (US) Nonfarm Payrolls (NFP) data for July, which will be published by the Bureau of Labor Statistics (BLS) on Friday at 12:30 GMT.

The report is a picture of the labor market at the end of each month, usually released on the first Friday of the following one. It indicates how many new jobs were added, how wage growth developed and the unemployment rate. The Federal Reserve (Fed) uses these data to make its monetary policy decisions amid its dual mandate of keeping stable prices and maximum employment. This time, however, the Fed announced its latest decision this Wednesday, somehow limiting the potential impact of the NFP on financial markets. 

What to expect from the July Nonfarm Payrolls report?

Market analysts anticipated that the US added 110,000 new job positions in July, below the 147,000 gained in June. The Unemployment Rate is expected to have ticked higher, from 4.1% to 4.2%. 

Additionally, wage inflation, as measured by Average Hourly Earnings, is expected to have risen by 0.3% in the month and by 3.8% from a year earlier, higher than the 0.2% and 3.7% respectively posted in June. 

Ahead of the release, multiple employment-related figures hint at a healthy labor market, while the Fed has stuck to its wait-and-see stance.

On the economic data front, the US reported that the number of job openings on the last business day of June stood at 7.43 million, according to the Job Openings and Labor Turnover Survey (JOLTS) released by the BLS. The reading was below the 7.77 million openings (revised from 7.76 million) recorded in May and came in below the market expectation of 7.55 million.

The ADP Employment Change report released on Wednesday was more encouraging, as it showed that the private sector added 104,000 new job positions in July, while the June loss was revised to 23,000 from the previous estimate of -33,000. 

In the meantime, the Fed announced that it left the benchmark interest rate unchanged, floating between 4.25% and 4.50% following its July meeting. Within the Federal Open Market Committee (FOMC), two dissenters voted for a rate cut: Governors Christopher Waller and Michelle Bowman.

Chair Jerome Powell explained that with inflation still above the Fed's 2% goal and the labor market still tight, the central bank should keep rates at their current levels, while leaving policymakers well-positioned to respond in a timely way. Powell also refused to give in to US President Trump's constant pressure to lower interest rates, reiterating that the impact of tariffs on inflation is yet to be seen. 

Given Powell's hawkish stance, the odds of a rate cut in September fell from nearly 60% before the meeting to roughly 43% after the press conference,  according to the CME Fedwatch Tool. 

It is worth noting that the flash estimate of the Q2 Gross Domestic Product (GDP) showed the US economy grew at an annualized rate of 3%, much better than the 0.5% decline from the first quarter and better than the 2.4% expected. 

How will the US June Nonfarm Payrolls affect EUR/USD?

Trade-war-related headlines in recent days have been mixed. The week started with optimism amid the announcement of a deal between the US and the European Union (EU), which followed a similar announcement between the US and Japan. The White House also reported continued talks with China. Hopes of an agreement helped the US Dollar (USD) run against all its major rivals, while the Fed's hawkishness fueled the Greenback's rally. 

Mid-week, however, and as the August 1 deadline loomed, deals with other major trading counterparts such as Canada, Australia or India were, and still are, in the air. Furthermore, Trump announced a whopping 50% tariff on Brazilian imports and a universal 50% tariff on imports of semi-finished copper products and copper-intensive derivative products, effective August 1.

The USD retains its strength ahead of the NFP release, with the EUR/USD pair trading near the 1.1400 threshold. Generally speaking, a solid NFP report showing higher-than-anticipated job creation and a steady unemployment rate should boost demand for the American currency, not only because of the good news, but also because it reinforces the Fed's wait-and-see stance. The opposite scenario is also valid, with a disappointing headline coupled with a higher-than-anticipated Unemployment Rate weighing on the Greenback.

Moderate job creation alongside an uptick in the Unemployment Rate, as expected, could have a limited impact, but would be overall positive for the USD.

Valeria Bednarik, FXStreet Chief Analyst, says: "The EUR/USD pair trades at its lowest in over a month, shedding roughly 400 pips from its July peak at 1.1830. The USD advance was a long-overdue correction, as the Dollar Index fell for five consecutive months before turning the tide in July. With that in mind, EUR/USD may well pierce the 1.1400 level on a strong NFP report, and extend its slide towards the 1.1340 region, where it set a monthly low in June. Additional slides could result in a fall towards the 1.1280 area."

Bednarik adds: "The EUR/USD pair needs to recover the 1.1470 level to shrug off the bearish momentum and be able to extend its recovery towards the 1.1550 area. A weekly close around the latter, however, will not be enough to confirm an interim bottom, with the risk still skewed to the downside in the mid-term."