The Federal Reserve's policy shift is imminent, and the September non-farm payroll report will be a watershed for the dollar's movement.

U.S. Bureau of Labor Statistics is scheduled to release the delayed September non-farm payrolls data at 13:30 Beijing time on Thursday. This release will become a key reference for judging the Federal Reserve’s policy direction in December.

Market generally expects employment to rebound month-over-month, but growth remains weak

Economists forecast September non-farm employment to increase by 50,000, a significant improvement from August’s gain of only 22,000. The unemployment rate is expected to stay at 4.3%, and the year-over-year growth rate of average hourly earnings is likely to remain flat at 3.7%.

TD Securities analysts are more optimistic about the data, believing employment growth in September could rebound to 100,000, with private non-farm employment adding 125,000, while government employment might decrease by 25,000. The firm also expects the month-over-month increase in average hourly earnings to fall back to 0.2% (year-over-year 3.6%), with the unemployment rate remaining at 4.3%.

Weakness in the ISM Manufacturing Index intensifies market concerns, macro data points to economic cooling

A series of recent weak economic data has sounded alarms in the market. The ISM Manufacturing Purchasing Managers’ Index for October fell to 48.7, below the expected 49.5, indicating manufacturing activity remains in contraction. In contrast, the ISM Services PMI unexpectedly rose to 52.4, with notable growth in new orders, but this cannot mask the difficulties on the manufacturing side.

More concerning is the ADP October employment change report, which shows the U.S. private sector added only 42,000 jobs, barely surpassing the forecast of 25,000. Meanwhile, Challenger, Gray & Christmas, an executive outsourcing firm, reported a month-over-month surge of 183.1% in corporate layoffs announcements, marking the worst October in over 20 years.

Market sentiment swings as Fed rate cut expectations rapidly reverse

Recent cautious remarks from Fed officials and weak employment data have shattered expectations of further easing. The October FOMC minutes warned that lowering borrowing costs could undermine efforts to combat inflation, and policymakers are divided on balancing risks.

According to the CME FedWatch tool, the probability of the Fed cutting interest rates by 25 bps in December has dropped sharply from 50% before the event and 65% a week ago to 33%. This shift reflects market pessimism about further policy adjustments by the Fed.

Wells Fargo economists note that although September data is somewhat lagging, it may be the last comprehensive employment report the Fed will have before the December meeting, making the market pay close attention.

Non-farm payrolls will determine short-term direction of USD and EUR/USD

The USD has recently rebounded against major currencies, but whether this momentum can continue depends on the quality of the employment data.

If September non-farm employment growth falls below 50,000 and the unemployment rate unexpectedly rises, it will confirm weakness in the U.S. labor market and restore market bets on a December rate cut. Under this scenario, the USD will face strong selling pressure, and EUR/USD will break through the 1.1600 level, rising to 1.1700.

Conversely, if the data shows significant employment growth and the unemployment rate remains below or drops further below 4.3%, expectations for a December rate cut will be dispelled, providing strong support for the USD. EUR/USD could continue its downward trajectory, touching below 1.1400, and the December rate cut bets will be completely invalidated.

Technical outlook: Key support levels tested for EUR/USD and other major pairs

Dhwani Mehta, Chief Analyst at FXStreet Asia, believes that EUR/USD broke below the 21-day simple moving average (SMA) at 1.1574 on Wednesday, with the 14-day Relative Strength Index (RSI) remaining below the midline on the daily chart, indicating increasing downside momentum.

If the decline continues, the low of November 5 at 1.1469 will serve as the first support. A break below that level, the 200-day SMA at 1.1395 will come into focus, with the psychological level of 1.1350 acting as the last line of defense for buyers.

Similarly, any rebound needs to be confirmed above the 21-day SMA at 1.1574. The next bullish target is near 1.1650, where the 50-day and 100-day SMAs intersect. Further gains will test the round number 1.1700.

The market is currently in a highly sensitive period, with the September non-farm payroll report poised to be a crucial turning point for USD and Fed policy expectations before the end of the year.