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The US dollar has come under pressure recently as increasing risk appetite drove up demand for higher-yielding currencies and equities. However, the July reading of NFPs is projected to show that the pace of job losses slowed, and the last time we saw a dramatic improvement, the US dollar ignored risk trends and rallied in response. Will we see a similar reaction on Friday?

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Arguments for an Improvement in Non-Farm Payrolls
1. Initial jobless claims (4-week avg) fell to a 27-week low of 555,250 during the week ending 8/1
2. Continuing claims (4-week avg) eased to 6,278,750 during the week ending 7/25, from 6,769,000 in the week ending 6/27
3. ADP employment fell by the least since October 2008, coming in at -371,000 in July
4. Challenger job cuts fell 5.7 percent in July from a year earlier, marking the second straight decline
5. ISM manufacturing employment component rose to 45.6 from 40.7, signaling that the pace of job losses slowed

Arguments for a Deterioration in Non-Farm Payrolls
1. Conference Board, University of Michigan consumer confidence both fell during July to 3 and 4-month lows, respectively
2. ISM non-manufacturing employment component fell to 41.5 from 43.4, signaling a steeper drop in jobs

Based on both economist forecasts and a variety of leading indicators, Friday's release of US non-farm payrolls (NFPs) is likely to show job losses for the nineteenth straight month in July, but the rate of decline is anticipated to slow. At the time of writing, Bloomberg News was calling for NFPs to decline by 328,000, but with the range of estimates reflecting expectations that NFPs could fall anywhere between 150,000 and 460,000, there is significant room for a surprisingly strong or weak number. Based on the improvements we've seen in leading indicators like initial and continuing jobless claims, the ADP employment change, and the employment component of ISM manufacturing, we expect that NFPs may prove to be better than consensus forecasts are calling for.

That said, the steady accumulation of job losses does not bode well for economic growth going forward and indicates that the unemployment rate will continue to climb, albeit at a slower pace. In fact, the July reading of the rate is projected to rise to 9.6 percent, the highest since June 1983, from 9.5 percent. Meanwhile, preliminary estimates of Q2 GDP for the US have shown a 1.2 percent drop in personal consumption, after it rose 0.6 percent in Q1 and contracted by more than 3 percent during each of the previous two quarters, suggesting that the trend in spending remains negative amidst bleak employment prospects and falling incomes.

How Will the US Dollar React?

At the end of the day, the US dollar is likely to only respond dramatically to a surprising result, where NFPs fall by far more or far less than forecasts. However, with leading indicators showing that the NFPs could reflect an improvement in the labor markets, we need to keep what happened on June 5 in mind. Indeed, on this date, NFPs has been forecasted to plunge by 520,000, but instead, they dropped by 345,000 and sent the US dollar surging, which was unusual because that greenback had generally been gaining only when economic news was disappointing due to market-wide flight-to-safety.

Now, we're still seeing a fairly strong link between the US dollar and risk trends, but if NFPs fall by much less than 328,000, a rally in the US currency could lead EUR/USD below immediate support toward the confluence of the 50 SMA and rising trendline support at 1.4080/1.4100. On the other hand, results in line with expectations could keep EUR/USD range bound between former resistance points at 1.4340 and 1.4435.

Source: FXTrek Intellicharts

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