How could USD React to January’s NFP Data?

On Friday, the US will release the official employment report for January.  Some analysts expect a 220K increase in payroll and a modest increase in the unemployment rate to 3.6%. Other expectations suggest 185,000 rise in Nonfarm Payrolls data following the 223,000 increase in December.

The first US NFP report in 2023 will be published 2 days after the Fed hiked interest rate. The awaited data may not cause much volatility for the dollar though it will still be critical in how it can provide extra input regarding whether monetary policy is moving in the right direction.

The tight labour market is losing steam and January’s update could provide confirmation of this on Friday. If forecasts are correct, NFP will mark the softest increase of 185k in a year, lifting the unemployment rate slightly higher to 3.6%. Average hourly earnings are forecast to decelerate at a relatively faster pace to 4.3% from 4.6% previously, signaling slowdown of the overall economic conditions as well.

Any sign that job matching is becoming more efficient will be good news for news for US businesses. The figures could also bring some relief to Fed policymakers who are concerned over wages and price.

There is no evidence that wages are fueling inflation so far, the Fed could follow its plan of pivoting rate increases. This week’s Employment Cost Index printed the smallest advance in a year last quarter. Wage concerns are far from over as the increase was relatively firm, and additional solid prints in the first quarter cannot be ruled out given that several companies implement annual changes in salaries at the start of each year.

 NFP Data, US dollar

A stronger-than-expected NFP report, and particularly an upside surprise in average hourly earnings, may bolster the bullish tone but the impact may be muted in the light of speculations on Fed’s next moves in monetary policy.

Following Fed Chair Jerome Powell’s remarks on Wednesday, the market is asymmetric around the upcoming NFP figure. That is, a positive surprise is not likely to materially derail risk sentiment, while an indication of weakness will reinforce it.

That will be key for the US dollar and other currency baskets which have more closely aligned itself to equity dynamics. That could prevent the USD from retreating to fresh lows in the near-term.

Eventually, economists expect to see dip buying interest in EUR/USD towards 1.08. Only one month earlier, The US economy added 223K jobs in December of 2022, the least since December of 2020, after a downwardly revised 256K rise in November, and beating market expectations of 200K.

Notable job gains occurred in leisure and hospitality (67K), health care (55K), construction (28K), and social assistance (20K) while employment changed little in manufacturing (8K), retail trade (9K) and government (3K). Payroll employment rose by 4.5 million in 2022, an average monthly gain of 375K, compared to 562K per month in 2021 and 168K in 2019.

The latest NFP report showed that hiring is slowing although it remains strong, as the labour market is normalizing after the pandemic shock. For 2023, the labour market is set to remain tight but job growth will slow further and the unemployment rate is set to rise to 4.6%, according to Fed forecasts. Several big tech firms have already announced massive layoffs amid rising interest rates, weak consumer demand, and a global economic slowdown.