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What are the potential outcomes for the US Dollar in the upcoming NFP?

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As we consider the potential outcomes of the upcoming Nonfarm Payrolls report, it’s important to consider the impact of rising inflation and interest rates on the housing market. While these factors may affect the labor market, the NFP has consistently exceeded economist expectations in recent months, leaving room for the possibility of another positive surprise.

The release of the US Nonfarm Payrolls report by the US Bureau of Labor Statistics (BLS) in January 2023 will be a significant event, as it will be the first top-tier economic release of the year and will provide insight into the Federal Reserve’s (Fed) monetary policy decisions.

Here are three potential scenarios to consider.

Scenario 1: The Nonfarm Payrolls report shows a increase of around 200,000 jobs, which is within the range of expectations.

Economists are anticipating an increase of 200,000 jobs in the upcoming Nonfarm Payrolls report, which would be lower than the 263,000 reported for the previous month but still indicative of a positive expansion in the labor market

If the Nonfarm Payrolls report meets expectations with an increase of around 200,000 jobs, it is likely that financial markets will experience some fluctuation and the US Dollar may strengthen due to increased uncertainty about the Federal Reserve’s future actions. The Dollar is often seen as a safe haven asset and may attract investors seeking stability. However, some investors may choose to wait for the release of the Consumer Price Index report before making any major decisions. It is also possible that the initial strength of the Dollar may reverse in the aftermath of the report’s release.

Scenario 2: The Nonfarm Payrolls report shows a strong increase of over 250,000 jobs, exceeding expectations and indicating continued growth in the labor market.

Recent reports, including Nonfarm Payrolls, weekly jobless claims, and JOLTs job openings, have indicated a strong and growing labor market in the US. With a high number of job openings and low unemployment, it is expected that the Nonfarm Payrolls report will show a continued increase of over 250,000 jobs, reflecting the overall strength of the job market.

Scenario 3: The Nonfarm Payrolls report shows a decrease of less than 100,000 jobs, indicating a slowdown or contraction in the labor market.

If the Nonfarm Payrolls report shows a decrease of fewer than 100,000 jobs, or even a loss of positions, it is likely that the US Dollar will decline in value while stock prices may rise on the expectation of an earlier end to the Federal Reserve’s tightening cycle.

This scenario, while less likely, is still a possibility as it is unlikely that job gains will continue at levels exceeding those seen before the pandemic indefinitely. In this case, the spotlight would be on the labor market and the potential for a slowdown or contraction.

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