USD/JPY Forecast: August NFP Data to Test September Rate Hike Expectations

U.S. non-farm payrolls will be released on Friday at 12:30 UTC and could test expectations for a September Fed rate hike.

What to expect from September’s NFP report?

Expectations are for 58,000 jobs to be added in August after just 23,000 jobs were lost in July, significantly missing market expectations, whilst May and June were also revised lower by a combined 103,000. The unemployment rate is expected to remain unchanged at 4.1%, after ticking down from 4.2% to 4.1% in July, while average hourly earnings are set to increase by 0.3% month-on-month, up from 0.1% in July.

Whilst July's data pointed to a cooling labour market, the August figures will help the market assess whether July's weakness was driven by short-term factors such as seasonal variations and a post-World Cup pullback, or if the U.S. labour market is undergoing a more structural cooling.

Given the weak payroll growth in July, the bar is low for a rebound in August. A notable rebound could ease market concerns over a continued deterioration in the labour market.

Lead indicators show some weakness

However, it's worth noting that JOLTS labour market data also showed the labour market losing momentum ahead of the NFP results. Job openings rose by 89,000 to 7.27 million, while hires fell by 278,000 to 5.05 million. This suggests that headline vacancies could be overstating the underlying strength of labour demand. Whilst employers are advertising positions, fewer of those vacancies are translating into actual hires.

Data yesterday also showed that hiring by private-sector employers fell short of expectations in August. The ADP payroll report showed 38,000 jobs added last month, below expectations of 48,000.

Separately, the ISM Manufacturing PMI employment subcomponent fell in August, showing factory hiring growth slowed. ISM Services PMI data will be released today, and the employment subcomponent will be monitored closely.

Fed rate hike expectations for September

The data comes as the market has ramped up expectations for a September rate hike from the Federal Reserve to 61%, up from 35% last week. Tightening expectations rose after Federal Reserve Chair Kevin Warsh spoke at the Jackson Hole Symposium and adopted a more hawkish tone.

The data points to a slightly weaker NFP reading, but this report is notoriously volatile. A weaker-than-expected report could see the market rein in expectations surrounding a September rate hike, which would pull the USD lower and could give stocks and gold a boost.

On the other hand, a stronger-than-expected report would help build hawkish Fed expectations, lifting the U.S. dollar. This could also bring some support to USD/JPY, which has been under pressure amid suspected intervention from Japanese authorities.

USD/JPY technical analysis

USD/JPY recovered from the 155.20 July low and ran into resistance at the 160 resistance zone before reversing lower and breaking aggressively below the 200 EMA. The pair is now testing support at 157.20, the 23.6% Fibonacci retracement of the 155.20–163.90 move. This, combined with the RSI below 50, keeps the near-term outlook bearish.

If NFP comes in weaker than expected, sellers will look to break below 157.20 and turn attention to the 155.20 low. A break below this level would create a lower low, turning attention towards 152.70, the February low.

A stronger report could aid a USD rebound. Any USD/JPY recovery would need to reclaim the 200 EMA at 158.00 before attention turns back to the 160 resistance zone, where the September high, 50 EMA and 61.8% Fibonacci retracement converge. A break above this zone would create a higher high and turn the outlook more bullish, bringing 162.00 into focus, the 78.6% Fibonacci retracement.