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It’s NFP time again, and you know the drill! Let’s take a look at what the markets are expecting, how the Fed could react, and what it could mean for the U.S. dollar.

NFP Expectations

The August non-farm payrolls report, which is due this Friday 1:30 pm GMT, is expected to show that 90,000 jobs were added during the month. This would reflect a slight downturn in hiring compared to the 117,000 increase in jobs last July.

The report could also show that private hiring rose by only 105,000 in August, which would be considerably less than the 154,000 increase seen the previous month. Despite the predicted slowdown, the jobless rate is still expected to hold steady at 9.1%.

Based on the recently released employment data, namely the ADP non-farm employment change and Challenger job cuts report, we might really be in for a heartbreaking NFP figure. The ADP report fell short of expectations as it showed that employment was up by only 91,000 instead of the projected 102,000. Meanwhile, Challenger reported that firms cut 47% more jobs in August from a year ago.

And who could forget the Philly Fed index released earlier this month? Recall that the figure slipped from 3.2 to -30.7 in August, reaching its lowest level since March 2009. Looking deeper into the numbers reveals that the current employment index tumbled by 14 points, marking its first negative reading in 12 months.

On the same fateful day that the Philly Fed index was released, Morgan Stanley downgraded global growth forecasts and warned that the U.S. is dangerously close to a recession. Some U.S. companies probably took this as a signal to downsize their operations and layoff some workers.

Fed Reaction

One potential effect of a weak jobs figure is a higher possibility of QE3 from the Federal Reserve. Although Ben Bernanke didn’t commit to more stimulus measures in the recently concluded Jackson Hole Symposium, he also didn’t say that QE3 wouldn’t happen at all. Bernanke even highlighted the weakness in labor growth and mentioned that the Federal Reserve is willing to act if necessary.

The FOMC meeting minutes released two days ago confirm this. The minutes revealed that the members of the FOMC were divided, as some demanded a more aggressive monetary policy stance. It’s also important to note that the next FOMC meeting will actually be extended to two days to discuss additional monetary policy tools.

Effect on Dollar

Given these things, I think fundamentals, rather than market sentiment, will play a big role once the actual figures of the NFP are released. A poor jobs data could translate to dollar selling as it will increase the possibility of QE. In the past, QE has always been negative for the Greenback.

But on the off chance that we see a strong figure, we’ll probably see the Greenback react positively. A number above 150,000 will be especially significant since that is the amount of jobs needed really overcome the high level of unemployment. Good news has been scarce and an upside surprise will help calm the double-dip recession fears of the market.