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Preview for August  NFPs & Strategy Outlook for USD-pairs

Preview for August NFPs & Strategy Outlook for USD-pairs

Talking Points:

- The DXY Index is holding below key resistence, the outside engulfing bar high from August 25, at 93.44; a weekly close above here would suggest a bottom is in place.

- Data today will either provoke another downdraft in the greenback, or could prove to be the stabilizing force the US Dollar desperately needs

- The retail trading crowd remains net-long the US Dollar, even as positioning has narrowed over the past week.

Join us today at 8:15 EDT/12:15 GMT for live coverage of the July US Nonfarm Payrolls report in the DailyFX Live Trading Room - register here.

The key issue surrounding today's August US Nonfarm Payrolls report is whether or not the US labor market is improving enough to reduce labor market slack and push up wage growth (which should help inflation), in order to justify the Federal Reserve starting its balance sheet normalization process at its meeting later this month, and hiking rates again before the end of of 2017.

As it stands today, markets don't think another hike is coming: Fed funds futures are pricing in June 2018 as the most likely period for the next move, and a less than one-in-three chance of a hike by December 2017. Market participants will be paying attention to the wage component of the report in particular, which has been admittedly lacking gusto despite the unemployment rate holding near the Fed's defintion of "full employment" (at 5% or lower) since for October 2015.

Current expectations for today's data remain are high after strong ADP Employment figures earlier this week; unfortunately, given the way the calendar falls this month, we don't have the insightful ISM Services figure. Nevertheless, the unemployment rate is expected to hold at a cycle low of 4.3%, and the headline jobs figure to come in at +185K. Wage growth is due in around +2.6% y/y.

The big picture: so long as it comes in above +75K to +125K, the jobs data will be good enough to keep the economy on track to maintain the unemployment rate (U3) at 4.3% through the end of 2017 (as per Fed Chair Janet Yellen's commentary at the end of February). The Atlanta Fed Jobs Calculator shows that the US economy needs to add +115K jobs each month for the rest of 2017 to maintain the unemployment rate at 4.3%.

Chart 1: DXY Index Daily Timeframe (March to September 2017)

A simple 'repeat' of the July jobs report in today's August NFP figures would be good enough to help the US Dollar make a run at clearing out that August 25 outside engulfing bar high at 93.44. If the August report were to mimic the July report, we should see: headline jobs growth above +200K; the unemployment rate holding at cycle lows; wage growth at or above expectations; and for the labor force participation rate to increase slightly. If the market can check the boxes on these four conditions, the US Dollar should end the week on a strong note.

Chart 2: USD/JPY Daily Timeframe (March to August 2017)

The timing of the US NFP report couldn't be more important for the US Dollar, especially with US yields holding near multi-month lows. A second consecutive all-around solid US jobs report should help US yields turn higher (which in turn will provide the fuel the US Dollar needs to close out the week strong). For USD/JPY, the 111.05 swing area (with tests in June, July, and August) remains crucial before a trend change can be determined. Elsewhere, EUR/USD hasn't closed below its daily 21-EMA since the end of June, and a break here would be a significant tell that prices may finally be topping out of a quiet a resilient run since April.

Chart 3: EUR/USD Daily Timeframe (March to September 2017)

Join us today at 8:15 EDT/12:15 GMT for live coverage of the July US Nonfarm Payrolls report in the DailyFX Live Trading Room - register here.

Read more: US Dollar Reversal Gathering Pace - Key Levels to Watch

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.