October NFP Report: Make or Break for the U.S. Dollar?

Expectations are running high for the upcoming U.S. non-farm payrolls (NFP) release, thanks to upbeat leading employment indicators and hawkish Fed rhetoric. FOMC policymakers did hint that they could hike interest rates in December if economic data comes in line with their expectations so… No pressure! None at all!

Why is this report a big deal?

The NFP report typically generates a strong and often volatile reaction from the major forex pairs since it indicates whether hiring picked up or slowed down during the month. Because of that, it gives market watchers a good idea of how other economic data such as consumer confidence, retail sales, and overall GDP growth might turn out.

Now this particular release could make or break the dollar’s trend since it’s one of the two remaining jobs reports lined up ahead of the much-anticipated December FOMC monetary policy decision. Keep in mind that Fed officials have specified that they’d like to see continued progress in the employment department before giving the green light for a rate hike.

How did the previous reports turn out?

The U.S. central bank has been on rate hike watch for the most part of this year but unfortunately for those in the hawkish camp, the NFP readings had been coming up short of expectations since June. To make things worse, hiring gains have been declining since then, chalking up less than 200K in employment growth for the last two releases.

For the month of September, the U.S. economy added only 142K jobs while the previous month’s reading was downgraded from 173K to just 136K. And don’t let the “improvements” in the jobless rate fool ya! Much of the decline to 5.1% can be attributed to a drop in the participation rate, which means that Americans have been exiting the labor force and giving up on their job hunt.

In other words, the employment situation ain’t lookin’ all that great, but Uncle Sam still has a chance to turn things around.

What do forex analysts expect?

Economic experts are expecting to see a 179K increase in hiring for October, which might be enough to keep the unemployment rate steady at 5.1%. Average hourly earnings could print a 0.2% uptick, which would be a welcome improvement over the previous flat reading and a sign that inflation could stay supported. Forex market participants are likely to pay close attention to the labor force participation rate as usual since this could expose underlying weaknesses in the job market.

As I’ve mentioned earlier, leading indicators point to a potential upside surprise, which suggests that forex junkies are setting the bar high for the October NFP report. While the employment component of the ISM manufacturing PMI indicated a contraction from 50.5 to 47.6, the non-manufacturing sector recorded a jump from 58.3 to 59.2. Meanwhile, the ADP non-farm employment change report printed a 180K gain in hiring as expected.

How might the U.S. dollar react?

Stronger than expected NFP results could yield more gains for the U.S. dollar, as expectations of higher interest rates could spark demand for U.S. assets and keep risk aversion in play. Keep in mind that policy tightening would mean higher borrowing costs for both consumers and businesses, which could dampen overall economic activity and inflationary pressures.

USD Index NFP Forex Price Action

USD Index NFP Forex Price Action

On the other hand, weaker than expected NFP data could trigger a sharp dollar selloff since this might throw cold water on Fed rate hike hopes. Be on the lookout for any significant revisions to previous reports also, as these are likely to be factored in the markets’ tightening expectations.

As I always say, if you’re not comfortable trading around this major event risk, there’s no shame in sitting on the sidelines and watching forex price action unfold. Just don’t forget to review the actual data and how the market reacted to see if you should adjust your trading biases.