Non-Farm Payrolls (JUL) (08:30 ET; 12:30 GMT)
Expected: 127K
Previous: 132K

Unemployment Rate (JUL) (08:30 EST; 12:30 GMT)
Expected: 4.5%
Previous: 4.5%

How Will The Markets React?

Job growth in the US is anticipated to slow during the month of July, as employers are estimated to have added 127,000 to non-farm payrolls, down from 132,000 in June. Meanwhile, the unemployment rate is predicted to hold at 4.5 percent for the fourth consecutive month. While the non-farm payroll report is almost always a big market-mover, it is becoming increasingly important as continued health in the US labor market is necessary to maintain personal spending growth – which makes up nearly 70 percent of the economy. In fact, we’ve already seen GDP for the second quarter showed that consumption slowed to a 1.3 percent pace, down from 3.7 percent in the first quarter. Furthermore, there is significant downside risk to the July NFP reading, as the employment index of the ISM manufacturing survey, the Monster employment index, the ADP employment change, and Challenger job cuts all proved to be dismal. On the other hand, the four-week average for initial jobless claims dropped to 305,500 at the end of July, the lowest level since the last week of May when NFPs jumped to a five-month high of 190,000. While there are a greater number of figures signaling a weak NFP number, the four-week average for initial jobless claims tend to serve as a better leading indicator, creating the potential for an upside surprise.

Bonds – 10-Year Treasury Note Futures

While the 107-27 level has served as ample resistance for 10-year Treasury Note futures, the recent consolidation appears to be forming as a bullish continuation pattern and it would take a close below 106-21 to discount the upside bias. The release of Friday’s NFP report could shake the contracts up, especially if the notoriously difficult-to-handicap figure misses estimates. A softer-than-expected reading could propel Treasuries even higher, targeting the 108-16 area, especially if risk aversion trends persist. On the flip side, a surprisingly optimistic NFP report may help keep the contracts from bubbling over.

FX – EUR/USD

Indecisive EUR/USD price action leaves ample room for a move in either direction on tomorrow’s non-farm payroll report, as the data is anticipated to be bearish for the US dollar. Furthermore, the recent consolidation of the pair has pushed EUR/USD just above the 1.3700 level, breaking a short-term resistance trendline and creating a bullish bias for the pair (bearish for the USD). Indeed, multiple labor market indicators have shown less resilient conditions for the month of July, adding to the risks for a disappointing NFP figure. On the other hand, a single, but more accurate, leading gauge for NFPs signal the potential for a jump on Friday from June’s reading of 132,000. As a result, there may be an opportunity for the US dollar to really and push EUR/USD back down to the 1.3600 area. Nevertheless, technical levels are working in favor of a move up to 1.3750.

Equities – S&P 500 Index

The S&P 500 may prove especially important to the US dollar, with recent equity market volatility actually serving to boost the downtrodden US currency. Perhaps counterintuitive at first glance, the stock market tumbles have shaken confidence in high-flying Euro and British pound—leaving traders to pull back US dollar short positions. This has of course kept the greenback aloft in past days of trade, and continued carry trade shakeouts can only continue to boost the currency. As such, it will be important to watch whether domestic equity markets—an appropriate barometer for global risk appetite—can resume their overall uptrend. If the S&P 500 breaks below a year-long trendline and a 200-day moving average at 1450, we could see the US dollar continue its recent advance against high-flying counterparts. However, surprise improvements in Friday’s NFP report could leave equity traders more confident about the US economy and push the S&P 500 up above 1,500 once again.

Terri Belkas is a Currency Strategist at FXCM.