Markets Brace for NFP as Rate Hike Bets Rise

EUR/USD: Failure at 1.1600 signals renewed selling pressure

The US Dollar strengthened throughout last week, buoyed by safe-haven demand and prospects of a rate hike this year. Not long ago, market participants were expecting a rate cut in June, but since the start of the Middle East conflict, that narrative has slowly shifted, and now the CME FedWatch tool displays odds for a rate hike during the current year.

The Federal Reserve is in a tight spot, with lower job creation and higher inflation due to rising oil prices. A rate hike would further affect the labor market, but would be needed if inflation were to ramp up again. At the time of writing, the highest probability of a rate hike is in October, but the odds are just 23%, according to the CME FedWatch tool.

The U.S. is considering sending up to 10,000 more troops to the Middle East war zone, which would likely push the end of the conflict further down the line. In the meantime, attempts at diplomacy did not yield any results, keeping markets on edge.

Economic Calendar Highlights

Labor market data will take center stage this week, with the first data coming out on Wednesday at 12:15 pm GMT in the form of the ADP Non-Farm Employment Change. This report shows changes in the number of employed individuals during the previous month, excluding government jobs and the farming industry. It tries to mimic the Non-Farm Payrolls report that will come out 2 days later, but it has a lower impact. The U.S. Retail Sales will also be released on Wednesday, at 12:30 pm GMT. The release is delayed by 16 days due to the U.S. government shutdown.

The main event of the week is the U.S. Non-Farm Payrolls report, scheduled for release on Friday at 12:30 pm GMT. Last month’s report was a massive disappointment, showing that the U.S. economy lost 92K jobs. For Friday’s release, economists expect job growth of 56K, but a weaker reading could further cloud the rate outlook. The Average Hourly Earnings and Unemployment Rate will be released at the same time, together painting an accurate picture of the U.S. jobs situation.

Technical Outlook – EUR/USD

Price action during the last couple of weeks has been capped by 1.1400 support and 1.1600 resistance, with the pair bouncing perfectly between the two levels. The last move is a rejection at 1.1600 resistance, on the back of a stronger dollar, which suggests that downside pressure will continue throughout the week.

The Relative Strength Index (RSI) was oversold recently, which already resulted in a move up. If the indicator drops to oversold territory again, there’s a chance of divergence forming, which would change the short-term technical outlook. For the time being, the bias is bearish, with 1.1400 as the first destination. Any new developments in the Middle East conflict will most likely affect the pair’s trajectory.