Focus on the non-agricultural payroll. Will the job market compensate for the economic slowdown?

Euro Fundamental Forecast: Neutral

  • The euro rallied slightly as the US dollar weakened last week
  • Markets continue to favor Fed pivot despite 75 basis point rate hike
  • All eyes are on the US labor market, will it contrast GDP data?

Last week, the euro rose cautiously against the US dollar. This appeared to be largely the result of broad-based greenback weakness, allowing the single currency to capitalize on dollar depreciation. What fueled this? It looked like the markets were pricing more in a Federal Reserve pivot. Are traders getting ahead, preparing for disappointment?

The Eurozone economic record is rather thin in the coming week, so the focus on the Euro will likely depend on external factors. In this case, it might be wise to look at what is happening in the United States. However, it should be noted that the European Central Bank has been issuing increasingly hawkish comments lately. But, as we will see, it still pales in comparison to the Fed.

Sentiment recovered last week, pushing the tech-heavy Nasdaq 100 higher. In July, the index gained about 12.5%, marking the best monthly performance since 2020. This despite the Fed announcing a 75 basis point rate hike last week, Chairman Jerome Powell clearly indicating that the central bank must fight and bring inflation down. The safe haven-linked US dollar depreciated.

However, the central bank seemed de-emphasize forward guidance and pivoting to a more meeting-by-meeting approach, emphasizing data dependency. Curiously, the inflation data suggests there is still a long way to go. If you take a closer look, markets could be pricing in a dovish pivot on growing fears of a recession. Last week’s US GDP showed the economy contracted for a second quarter, meeting the technical definition of a recession.

This probably helped the euro rally to some extent. However, the markets could get ahead of themselves. Last week’s inflation data continued to show that the Fed has a problem to solve. The employment cost index, which is the central bank’s preferred wage indicator, surprised up to 1.3% q/q in Q2 against 1.2% observed. Meanwhile, the Fed the ideal inflation gauge also exceeded estimates.

This is a rather unusual situation for the central bank. Growth is weakening, but inflation remains high, possibly due to a tight labor market – see chart below. Some may see this as a sign of stagflation. Job openings in the United States are still strong, the unemployment rate is quite low, and labor force participation has never returned to pre-pandemic levels. Does this mean that there is room for growth to continue to weaken and that the labor market has room to absorb this deterioration? Maybe.

In the coming week, all eyes will therefore be on the next nonfarm payrolls report. For July, the economy is expected to add 250,000 jobs, with unemployment remaining at 3.6%. A slight slowdown is observed in average hourly earnings, with a result of 4.9% year-on-year expected against 5.1% previously. These estimates remain healthy and will likely contrast with the Fed’s pivot expected by the markets. As such, be vigilant. Volatility may return again, opening the door for a reversal in the US Dollar, putting pressure on the Euro.

The US labor market remains tight

The data sourceBloomberg, Graphic created by Daniel Dubrovsky

— Written by Daniel Dubrovsky, Strategist for

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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