The US dollar faces a turning point: Can September non-farm payroll data change market expectations?

EUR/USD hovers around the 1.1600 level as markets await key signals from the US employment report

The next direction of Federal Reserve policy is being sought in September’s non-farm payroll data. The U.S. Bureau of Labor Statistics is scheduled to release the delayed employment data at 13:30 Beijing time on Thursday. This report will directly influence the recent trend of the dollar and also determine market expectations for the Fed’s rate cut probability in December.

The gap between market expectations and reality

This month’s employment report is highly anticipated due to poor August data—only 22,000 jobs added, well below market expectations. Economists forecast that September’s non-farm payrolls will rebound to 50,000, with the unemployment rate remaining at 4.3%. Meanwhile, as a gauge of wage inflation, average hourly earnings are expected to maintain a year-over-year growth of 3.7%.

However, some analytical institutions have offered more optimistic forecasts. TD Securities believes that employment growth in September could reach 100,000, with private non-farm employment increasing by 125,000 and government employment decreasing by 25,000. This discrepancy reflects differing market views on the outlook for the labor market.

Warning signals behind economic data

A series of recent economic data releases have conveyed different messages. The ADP report on November 5th showed that in October, the U.S. private sector added only 42,000 jobs, barely exceeding the expected 25,000. At the same time, Challenger, Gray & Christmas, a staffing firm, found that announced layoffs surged by 183.1% month-over-month, marking the worst October performance in over 20 years.

In manufacturing, the situation is even more severe. The ISM Manufacturing Index for October was 48.7, below the expected 49.5, falling into contraction territory, often a sign of softening employment conditions. In contrast, the ISM Services PMI unexpectedly rose to 52.4, with a significant increase in new orders providing a bright spot.

The Fed’s dilemma

Recently, the tone of Fed officials has shifted noticeably. Minutes from the October monetary policy meeting warned that lowering borrowing costs could weaken efforts to combat inflation, making policymakers more cautious about further easing.

According to CME Group’s FedWatch tool, after the minutes were released, market expectations for a rate cut in December sharply declined. The probability of a rate cut dropped from about 50% before the event and 65% a week earlier, to 33% after the release. This aggressive adjustment reflects a reassessment of the Fed’s stance.

Two scenarios for the September non-farm payroll data

Bearish scenario for the dollar: If September non-farm payrolls are below 50,000 and the unemployment rate unexpectedly rises, it will confirm significant weakness in the U.S. labor market. Under this scenario, the market will resume betting on a rate cut in December, and the dollar will face strong selling pressure, with EUR/USD potentially rebounding to 1.1700.

Bullish scenario for the dollar: Conversely, if non-farm payrolls show substantial growth and the unemployment rate remains at 4.3% or even declines further, the market will abandon expectations of a rate cut in December, and EUR/USD will continue its downward trend, further falling below 1.1400. Strong employment data will provide additional upward support for the dollar.

Technical clues

From a technical perspective, EUR/USD has broken below the 21-day simple moving average (SMA) at 1.1574. The 14-day Relative Strength Index (RSI) on the daily chart remains below the midpoint, increasing the likelihood of further decline.

If the downward momentum continues, the next support level is at the November 5th low of 1.1469. A break below this level would threaten the 200-day SMA at 1.1395. The key support zone is around the psychological level of 1.1350.

Conversely, any rebound needs confirmation above the 21-day SMA (1.1574). An upward move would focus on the confluence of the 50-day and 100-day SMAs near 1.1650; a further breakout could lead to testing the 1.1700 round number.

The significance behind lagging data

Although September’s non-farm payroll report is somewhat lagging, it still holds important reference value for the Fed’s decision-making. According to Wells Fargo, this report may be the last comprehensive employment report the Fed will have before its December monetary policy meeting. This makes September’s employment data a critical window for assessing the true state of the U.S. labor market.