EUR/USD outlook: Strong US jobs data complicates Fed's task – Forex Friday

Well, the US labour market just threw a curveball. The September non-farm payrolls came in hot, adding 254,000 jobs—well above the 140,000 expected. That’s a big jump, and the implications are clear: the US jobs market is still powering along, despite whispers of a slowdown. Powell had already talked down the prospects of another 50-bps cut, and today’s jobs report has put the nail in the coffin for those talks. The dollar has surged, sending the USD/JPY surging higher. Gold initially fell, before it powered higher along with stock indices and silver, with the latter almost breaking the $33 barrier, before both metals and indices eased off their highs. With so much going on in the Middle East and given the weekend risk, the initial NFP-related market reaction for indices may not hold into the close. But the dollar looks strong and backed by several supporting factors now. So, the EUR/USD outlook remains bearish heading into the weekend.

Breaking down the details of NFP

The non-farm payrolls data was much stronger than expected and the unemployment rate fell to 4.1%. What’s more, revisions increased reported employment for July and August by 72K. The data suggests the jobs market is remaining strong, confounding recent labour indicators. Average earnings came in stronger, rising 0.4% on a month-over-month basis compared to 0.3% expected, lifting the year-over-year rate to 4.0%.

Strong wages, combined with a healthy headline jobs figure, effectively quashes hopes for another 50-basis point rate cut this year.

Private payrolls were another big winner, clocking in at 223,000—well above the prior 118,000. Even after revisions, the numbers still beat expectations. And the underemployment rate (U6) fell to 7.7% from 7.9%, showing that more people are finding full-time work. Speaking of which, full-time employment surged by 631,000, a sharp turnaround from the previous month’s decline.

Average hourly earnings were also stronger than anticipated, rising by 0.4% month-over-month compared to the 0.3% expected. Year-over-year, wages are up 4.0%, beating the 3.8% forecast. This is key because rising wages could add fuel to inflationary pressures, giving the Fed more reason to stay cautious on rate cuts.

On the flip side, manufacturing payrolls dipped by 7,000 jobs, though this is still an improvement from the prior month’s -24,000. But let’s be honest, it’s the broader labour market that’s driving the narrative here, and manufacturing weakness isn't enough to derail the overall bullish sentiment.

EUR/USD outlook: What’s Next for the Fed?

The Fed now finds itself in a bit of a bind. On one hand, inflation is still a concern, especially with wage growth holding firm. On the other hand, they need to avoid cooling off the economy too much. But after a report like this, the chances of a 50 basis point cut have significantly diminished. Even if the October jobs data softens, it would take a dramatic downturn for the Fed to justify such an aggressive move.

Week ahead: US inflation and consumer sentiment data.

US CPI (Thursday)

US inflation has eased back sharply in recent months, and this has allowed the Fed to kick off the cutting cycle with an oversized 50 basis point trim. Though the Fed Chair has recently pushed back against expectations of another 50 bps cut at the FOMC’s next meeting, if CPI were to decline more rapidly than expected then this could trigger another dovish repricing in US rates and the dollar. Headline CPI is expected to print 2.3% y/y in September, compared to 2.5% the month before.
UoM Consumer Sentiment (Friday)

The Fed has two dual mandates, namely, to promote maximum employment and achieve stable prices. It looks like it has finally achieved to get inflation under control and so it is no longer a major focal area for the markets - unless CPI unexpectedly comes in hot or too cold the day before. Instead, the focus has turned on employment and the economy, making sentiment indicators, which provide leading indications about hard data, all the more important.

Technical EUR/USD outlook

Source: TradingView.com

From a purely technical point of view, the EUR/USD outlook has been dealt another blow after rates broke key support at 1.1100 - 1.0225. This area is now going to be the most important resistance to watch next week. In terms of potential support, the area just below the 1.0900 handle marks the 200-day average, so we may see some price action around that area, should we get there.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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