US Nonfarm Payrolls Report: Analyzing the May NFP

• US Nonfarm Payrolls are likely to show an increase of 190,000 jobs in May.
• The headline NFP figure and average hourly earnings will likely influence the Fed rate outlook.
• The US unemployment rate is expected to rise to 3.5% in May, up from 3.4% in April.

Prior to the release of the US Nonfarm Payrolls, the US dollar (USD) is experiencing a corrective decline from the highs of two months, affected by rising expectations of a pause in the US Federal Reserve (Fed) rate hike in June and congressional approval of the suspension of the US debt ceiling. The May jobs report could provide clues as to whether the Fed will end its tightening cycle, triggering fresh volatility around the dollar.

The dovish words from Fed Chairman Jerome Powell delivered last month, briefly stopped the bullish trajectory of the US dollar. In his speech at the Thomas Laubach Research Conference panel “Monetary Policy Outlook,” Powell said the recent crisis in the banking sector, which led to a tightening of credit standards, has eased the pressure to raise interest rates.. “Our policy rate may not have to go as high as it otherwise would have,” she added. Since then, the dollar has appreciated on the back of interest rate outlooks from various Fed officials, good US economic data and optimism about the US debt ceiling deal.

In an interview with the Financial Times (FT) earlier this week, the president of the Federal Reserve Bank of Cleveland, Loretta Mester pointed out that there is no “compelling” reason to wait before making a new rate hikeadding that the “debt ceiling deal removes a lot of uncertainty about the US economy.”

However, Philadelphia Fed President Patrick Harker and Fed Governor Philip Jefferson called for a pause on rate hikes in June, prompting investors to price in the prospect of a pause in the tightening cycle by the Fed this month. Faced with dovish words from the Fed, the probability of a 25 basis point (bp) rate hike in June dropped from 62% to 38%, where it stands now.

What can we expect from the next Nonfarm Payrolls report?

This Friday the monthly employment report for May in the United States will be published. Markets expect the US economy to have created 190,000 jobs during the reported monthcompared to the 253,000 reported in April. The unemployment rate is expected to stand at 3.5% in the fifth month of the year, compared to 3.4% registered in April.

Average hourly earnings will gain attention, along with non-farm payrolls, as they could shed light on wage inflation in the country, which could influence the Fed’s rate outlook. Average hourly earnings are forecast to rise in May at the same pace as April, up 4.4% yoy.

It should also be noted that Data released by Automatic Data Processing (ADP) showed on Thursday that employment in the US private sector increased by 278,000 people in May.. This reading followed April’s rise of 291,000 and was well above market expectations of 170,000. Besides, the ISM PMI Manufacturing survey employment index rose to 51.4 in May from 50.2, revealing an increase in employment in the manufacturing sector.

Analysts at TD Securities expect a slight slowdown in payroll growth in May: “US payrolls likely slowed modestly in May, advancing at a still strong pace of more than 200,000 for the second month in a row. We also expect that the unemployment rate remains unchanged at its record low of 3.4% and wage growth stands at 0.3% mom (4.4% yoy).”

When will the US Non-Farm Payrolls be reported and how could it affect EUR/USD?

The release of the Non-Farm Payrolls is scheduled for June 2 at 12:30 GMT. The EUR/USD pair has recovered to the 1.0700 level ahead of the release of the employment report. Therefore, it will be interesting to assess whether the labor market data could help sustain the renewed rise in the pair.

If the NFP data beats forecasts and wage inflation is higher, the Fed could raise rates again by 25 basis points on June 14, reinforcing the dollar’s rise at the expense of the euro..

Conversely, the dollar could come under intense selling pressure if the jobs data disappoints markets and throw cold water on expectations of further Fed rate hikes. EUR/USD could post a strong rally in reaction to US jobs data.

For his part, Dhwani Mehta, FXStreet Asian Session Chief Analyst, provides a brief technical overview for the EUR/USD pair, writing: “With the 14-day Relative Strength Index (RSI) still lurking below the line The ongoing rally in the EUR/USD pair appears to be at risk, and the 21-day SMA is about to break through the flat 100 SMA from above, warranting caution for EUR buyers. /USD”.

Dhwani also outlines important technical levels to trade the EUR/USD pair: “On the upside, Euro buyers need acceptance above confluence resistance near 1.0820, where the 21-day and 50-day SMAs meet. Before that, the EUR/USD must recover the psychological level of 1.0800. On the other hand, immediate support awaits at the round level of 1.0700below which is the minimum of the previous day in 1.0661. The line in the sand for Euro bulls is seen at the May low in 1.0635“.

About the non-farm payroll report

Nonfarm Payrolls released by the US Department of Labor report the number of new jobs created during the previous month, at all nonfarm businesses.

Monthly changes in payrolls can be extremely volatile, due to their high relationship to economic policy decisions made by the US Federal Reserve. The number is also subject to sharp revisions in the coming months, and those revisions also tend to to trigger volatility in the foreign exchange market.

Generally speaking, a high reading is considered positive (or bullish) for the US dollar, while a low reading is considered negative (or bearish), although revisions from the previous month and the unemployment rate are just as relevant as the headline figure. .