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If y’all think it’s a little too early in the week to prep for NFP Friday, think again! Not only does this top-tier report come with an extra dose of short-term forex volatility, but it could also make or break Greenback’s longer-term trend.

Why is the NFP report a big deal?

For the newbie forex traders just tuning in, NFP stands for non-farm payrolls, which shows the change in the number of employed people in non-farming industries during the reporting period.

As such, it serves as an indicator of whether jobs were created or lost that month. Employment gains usually lead to stronger consumer spending, which then supports business production and overall economic growth.

An upbeat growth outlook tends to spur currency appreciation, especially when forex traders are expecting some form of monetary policy tightening from the central bank.

And in case you missed the latest FOMC statement, lemme tell you that Fed officials just emphasized that a potential interest rate hike depends on how the next jobs figures turn out.

How did the previous release turn out?

The June NFP report was a bit of a downer for dollar bulls since the actual reading came in at 223K, short of the consensus at 230K. The jobless rate fell from 5.5% to 5.3% but this was spurred mostly by a huge drop in labor force participation, reflecting weaker confidence in job market prospects.

Average earnings stagnated instead of showing the estimated 0.2% uptick, indicating a lack of wage growth in June.

EUR/USD 15-min Forex Chart
EUR/USD 15-min Forex Chart

With that, the U.S. dollar got dumped against most of its forex peers at the time of the release, although the initial reaction was quickly faded when U.S. traders booked profits ahead of the Fourth of July long weekend back then.

What’s expected for the July report?

The U.S. economy is expected to have added 220K jobs during the month, a slower pace of increase compared to June’s 223K figure. This should be enough to keep the unemployment rate steady at 5.3% in July.

Keep in mind that the previous release churned out weaker-than-expected results for June while the May reading suffered a downgrade from the initially reported 280K figure to just 254K.

In fact, the U.S. Bureau of Labor Statistics has been making negative revisions on the jobs figures since February!

Leading labor indicators also suggest a potential disappointment, as the July ISM manufacturing PMI report showed a significant drop in its employment sub-index from 55.5 to 52.7 while the ADP non-farm employment change figure is projected to fall from 237K to 218K.

In addition, seasonal swings in employment data from the educational sector in summer could also lead to some surprises.

How might the U.S. dollar react?

The U.S. dollar could be in for a nasty selloff if the actual NFP reading comes in below consensus, as this might convince most forex market watchers that the Fed won’t be ready to hike interest rates by September.

On the other hand, a stronger-than-expected jobs figure could allow the Greenback to extend its rallies, with some analysts saying that anything over 225K could support a Fed “liftoff” before the end of the year.

Underlying jobs data such as the participation rate, which indicates whether Americans are leaving or returning to the labor force, and the average hourly earnings figure could also have a say in dollar movements.

Upbeat data on all fronts could help the U.S. dollar gain enough bullish momentum for the next few weeks while mixed figures could still spur profit-taking among dollar longs.