All Eyes on NFP as Fed Maintains Rates for the Eighth Time

The Federal Reserve maintained interest rates 5.50% in July, as expected by the market. All eyes are now on the crucial July NFP data release, which would likely impact the upcoming FOMC meeting on Sept 18. The data is set to be released on Aug 2, 2024 at 4:30pm GMT+4 (Dubai time).

The Nonfarm Payroll (NFP) report is a crucial economic indicator for the United States, revealing the total number of paid workers in the country, excluding those employed by farms, private households and nonprofit organization. The NFP is released on the first Friday of each month. It indicates the monthly increase or decrease in paid workers, impacting market rates significantly. Rising numbers may signal economic growth but also raise concerns about inflation, while declining numbers suggest broader economic issues. This report is closely monitored by analysts, traders, investors, and speculators in the forex market due to its potential to cause significant rate movements. Anticipation of the NFP number and its effects on forex is high, making it a key event in the financial world.

A BRIEF GLANCE ON THE LAST TWO NFP’s

In June, U.S Nonfarm Payrolls exceeded expectations by adding 206,000 jobs, although slightly lower than May's 218,000. This led to a strengthening of the US dollar. For July, forecasts predict a slight decrease to 177,000 jobs, signaling potential contraction in the economy. A reading above 177,000 indicates economic expansion, while a decrease suggests a less attractive dollar for traders.

POTENTIAL EFFECT OF NFP ON U.S STOCKS

The Non-Farm Payroll (NFP) figure can affect the U.S stock market in two distinct ways. A stronger-than-anticipated NFP figure can signal a robust economy and increased consumer demand, leading to improved company performance, higher earnings, and heightened investor confidence, ultimately driving the stock market upwards. Conversely, if the Federal Reserve opts to raise interest rates, positive employment data could bolster a further increase, putting pressure on the stock market.

Currently, market expectations lean towards a potential rate cut by the Fed due to decreasing inflation nearing the 2% target. As at the time of writing, around 88.5% of analysts and market participants anticipate the Fed to cut rates by at least 25 bps by Sept 18, 2024, according to the Fed Watch tool. However, during the July policy meeting, one of the keynotes by the Fed was that the “Fed does not expect it will be appropriate to lower rates until it has gained greater confidence inflation is moving sustainably toward 2%." A higher-than-expected NFP reading this Friday could cause a domino effect thereby hinting a potential future inflationary pressure.

RELATIONSHIP BETWEEN NFP AND GOLD

The price of gold tends to move in the opposite direction to the value of the U.S dollar, creating a strong inverse correlation. This means that alterations in the Non-Farm Payrolls (NFP) figure can impact the price of gold.  According to analysts, when the dollar strengthens, gold prices usually decrease. Conversely, when the U.S dollar weakens, gold prices tend to rise. This relationship underscores the importance of monitoring economic indicators such as the NFP when assessing the precious metal market.

POTENTIAL EFFECT OF NFP ON THE DOLLER IN RELATION TO OTHER CURRENCIES

When individuals wish to invest in currencies, they prefer currencies backed by a strong economy with a robust employment sector. In addition, if employment is high, the Federal Reserve is also likely to increase interest rates or keep them high. Again, this can support demand for the dollar.

In the light of this, analysts suggest that a high employment data reading this Friday would likely favor the U.S dollar, thereby causing the dollar to rise. In scenarios where the USD is the base currency, such as USDCAD and USDJPY, we would likely observe a temporary uptrend. Conversely, when the USD is the quote currency, like in EURUSD or AUDUSD, traders often opt to sell the dollar, leading to bearish conditions. Negative data typically weakens the dollar, prompting traders to short pairs with USD as the base currency and long pairs with USD as the quote currency. This dynamic plays a crucial role in shaping market trends and investor sentiment.

TECHNICAL VIEW:

US100

The US100 traded low and closed at 18,796 on Tuesday, but made recovery and closed high on Wednesday at 19,362. As at the time of writing, price is around 19,475. It broke and retested a major resistance around 19,217, with the red trendline and green horizontal line serving as confluence. The RSI trying to make it way back to below 70 level could also indicate a retracement.  A positive NFP could likely cause a surge, as analysts suggest, and hence further move to the upside with potential target around 19,875. While a negative data could cause US100 to decline with potential targets at 19,217 and 18,621. The place of further breakout of these levels can’t be ruled out.

Figure 1: Nasdaq 100 Spot, TradingView

XAUUSD

The precious metal on the other hand struggles to push higher as price is pined below $2460. As at the time of print price is at $2445. A negative data reading could cause gold to surge with potential targets around $2460, $2474 and $2484, as suggested by analysts. The place of further breakout isn’t ruled out. On the other hand, a positive data reading could cause gold to decline. Analysts point out a potential downside target around $2430 and if successfully taken out, there is still much room to tank to the $2400 psychological level and even further to $2380 while still giving room for further decline.

Figure 2: Gold Spot / U.S. Dollar, TradingView