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It’s NFP time again, follks!

Tomorrow at 12:30 pm GMT the U.S. will print its non-farm payrolls (NFP) report. Since Uncle Sam is the largest economy in the world, investors pay particular attention to its employment numbers as it’s one of the major leading indicators of economic growth.

According to a Bloomberg Survey of 68 economists, the NFP is expected to come in at 100,000 for the month of July after printing an additional 80,000 workers last June. If this happens, it would mark the second consecutive month of increasing jobs gains for the employment sector.

Think the numbers are too optimistic? Keep in mind that the ADP report released yesterday blasted expectations for a 120,000-increase by coming in at 163,000 for July. And despite its not-so-stellar record at predicting the actual NFP figures, it’s pretty accurate in predicting its direction.

But before you buy high-yielding currencies like it’s a ticket for the Olympics’ opening ceremony, you should know that market players aren’t expecting the 100,000 figure to make a dent on the unemployment rate.

Unemployment is expected to remain at 8.2% thanks to the U.S. firms’ preparation for a possible “fiscal cliff” by next year. And that’s before we talk about deteriorating prospects for local and global economic growth!

Even Big Ben isn’t keeping his hopes up. In his testimony to Congress last month, Bernanke speculated that the reduction in the unemployment rate will likely be slow as the projected jobs growth rate is just barely above the levels needed to absorb new entrants to the labor force. Yikes!

That said, it seems to me that most people are gearing up for another set of worse-than-expected figures. To be honest, I wouldn’t be surprised if we do see the NFP report disappoint. After all, it’s failed to hit forecasts FOUR months in a row now!

How do you think will the markets react if the numbers do disappoint? And will this alter QE3 expectations?

In my opinion, it’ll come down to a battle between risk aversion and renewed hopes for more quantitative easing measures. Here are two potential scenarios that could occur should we see WORSE-THAN-EXPECTED employment figures.

Scenario A – Dollar rallies as risk aversion takes over the markets

EUR/USD Chart

This is exactly what happened at the last NFP release last July 6, 2012. After ranging during the Tokyo and London sessions, EUR/USD broke down as the employment numbers failed to satisfy the markets and we saw risk aversion take over.

Scenario B – Dollar sinks as poor NFP figures boost QE3 hopes

EUR/USD Chart

In this scenario, we would see something similar to what happened on June 1, 2012. Yes, the NFP report printed deep in the red, but instead of sparking risk aversion, we saw EUR/USD rally as this sparked hopes that the Fed would get off its butt and introduce additional quantitative easing measures.

Seeing as how the Fed has been pretty cautious lately, if we see a 5th consecutive month of worse-than-expected gains, it may prove to be the tipping point for the central bank to finally hit the markets with QE3.

Of course, nothing is set in stone. The NFP report is the granddaddy of all economic reports and we’ve seen so many different types of reactions in the past. As the adidas slogan goes, ANYTHING IS POSSIBLE!

If you think that the NFP report is too hot to handle, then the best option may be to just sit out. Having no position is a position! But if you’re trading the report, just make sure that you stick to your plan and practice good risk management skills. That way we’ll still see you around in next month’s NFP release!